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

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  • Aslam, Faheem
  • Aziz, Saqib
  • Nguyen, Duc Khuong
  • Mughal, Khurram S.
  • Khan, Maaz

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.

Suggested Citation

  • Aslam, Faheem & Aziz, Saqib & Nguyen, Duc Khuong & Mughal, Khurram S. & Khan, Maaz, 2020. "On the Efficiency of Foreign Exchange Markets in times of the COVID-19 Pandemic," MPRA Paper 102458, University Library of Munich, Germany, revised Jul 2020.
    • Handle: RePEc:pra:mprapa:102458
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    More about this item

    Keywords

    COVID-19 pandemic; forex market; MF-DFA; high frequency; efficiency;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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