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On the efficiency of foreign exchange markets in times of the COVID-19 pandemic

Abstract : We employ multifractal detrended fluctuation analysis (MF-DFA) to provide a first look at the efficiency of forex markets during the initial period of the ongoing coronavirus disease 2019 (COVID-19), which has disrupted the global financial markets. We use high-frequency (5-min interval) data of six major currencies traded in forex markets during the period October 1, 2019 to 31 March 31, 2020. Before applying MF-DFA, we examine the inner dynamics of multifractality through seasonal and trend decompositions using loess. 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 COVID-19 outbreak and (ii) heterogeneous effects on the strength of multifractality of exchange rate returns under investigation. The largest effect is observed for the Australian dollar, which shows the highest (lowest) efficiency before (during) the COVID-19 pandemic, assessed in terms of low (high) multifractality. The Canadian dollar and the Swiss Franc exhibit the highest efficiency during the COVID-19 outbreak. Our findings may help policymakers shape a comprehensive response to improve forex market efficiency during such a black swan event.
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https://hal-rennes-sb.archives-ouvertes.fr/hal-02966920
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Submitted on : Wednesday, October 14, 2020 - 3:28:43 PM
Last modification on : Thursday, October 15, 2020 - 3:20:18 AM

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Faheem Aslam, Saqib Aziz, Duc Khuong Nguyen, Khurrum Mughal, Maaz Khan. On the efficiency of foreign exchange markets in times of the COVID-19 pandemic. Technological Forecasting and Social Change, Elsevier, 2020, 161, pp.120261. ⟨10.1016/j.techfore.2020.120261⟩. ⟨hal-02966920⟩

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