Martingale difference hypothesis and financial crisis: Empirical evidence from European emerging foreign exchange markets

Abstract

This study investigates the effects of the recent global crisis on the relative efficiency of six CEE currency markets, using the generalized spectral test of Escanciano and Velasco (2006) in a rolling window approach. The empirical results show that the global crisis adversely affected the efficiency of most CEE currency markets, with the Turkish lira being hit the hardest, followed by the Russian ruble, Czech koruna, Romanian leu, Polish zloty and Hungarian forint. In the first stage of the crisis, covering the second half of 2008 and the first months of 2009, all foreign exchange markets experienced periods of inefficiency. In the second stage of the crisis, the Hungarian, Polish and Romanian foreign markets recovered market efficiency quickly, while Russia, Turkey and the Czech Republic continue to register a low degree of efficiency.