On the Efficiency of Foreign Exchange Markets in Times of the COVID-19 Pandemic

32 Pages Posted: 30 Jun 2020

See all articles by Faheem Aslam

Faheem Aslam

Hanyang University - School of Business

Saqib Aziz

ESC Rennes School of Business

Duc Khuong Nguyen

IPAG Business School

Khurrum Mughal

Comsats University Islamabad

Maaz Khan

COMSATS University Islamabad

Date Written: May 20, 2020

Abstract

We employ multifractal detrended fluctuation analysis (MF-DFA) to provide the first look at the efficiency of forex markets during the initial period of ongoing COVID-19 pandemic, which has disrupted the financial markets globally. We use high frequency (5-min interval) data of six major currencies traded in the forex market for the period from 01 October 2019 to 31 March 2020. Prior to the application of MF-DFA, we examine the inner dynamics of multifractality using seasonal-trend decompositions using loess (STL) method. Overall, the results confirm the presence of multifractality in forex markets, which demonstrates, in particular: (i) a decline in the efficiency of forex markets during the period of COVID-19 outbreak, and (ii) the heterogeneity in the effects on the strength of multifractality of exchange rate returns under investigation. The largest effect is observed in the case of AUD as it shows the highest (lowest) efficiency before (during) COVID-19 assessed in terms of low (high) multifractality. During COVID-19 period, CAD and CHF exhibit the highest efficiency. Our findings may help policymakers in shaping a comprehensive response to improve the forex market efficiency during such a black swan event.

Keywords: COVID-19; pandemic; forex market; MF-DFA; high frequency; efficiency

JEL Classification: C10; C32; G10; G15

Suggested Citation

Aslam, Faheem and Aziz, Saqib and Nguyen, Duc Khuong and Mughal, Khurrum and Khan, Maaz, On the Efficiency of Foreign Exchange Markets in Times of the COVID-19 Pandemic (May 20, 2020). Available at SSRN: https://ssrn.com/abstract=3632921 or http://dx.doi.org/10.2139/ssrn.3632921

Faheem Aslam

Hanyang University - School of Business ( email )

222, Wangsimni-ro
Seongdong-gu
Seoul
Korea

Saqib Aziz (Contact Author)

ESC Rennes School of Business ( email )

Rue Robert d'arbrissel, 2
Rennes, 35065
France

Duc Khuong Nguyen

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

HOME PAGE: http://www.ipag.fr/en/

Khurrum Mughal

Comsats University Islamabad ( email )

Park Road
Chak Shahzad
Islamabad, North-West Frontier Province 44000
Pakistan

Maaz Khan

COMSATS University Islamabad ( email )

COMSATS University Islamabad
Islamabad, 44000

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