Abstract
This study investigates the efficiencies of the exchange markets for four major currencies—the euro (EUR), the pound (GBP), the Canadian dollar (CAD) and the Japanese yen (JPY)—from 2005 to 2019 by using multifractal detrended fluctuation analysis (MF-DFA). This study also investigates the causes of these efficiencies. Significant multifractal properties are demonstrated by the four markets, and long-range correlation and fat-tail distribution properties are the main causes. We calculate and compare the multifractal degrees in three subsamples, which are classified based on their temporal relation to two economic events: the 2008 financial crisis and the announcement by the Federal Reserve of its withdrawal from the quantitative easing policy in 2014. Empirical results suggest that multifractal properties exist at different levels in the subsamples, thus showing that these events affect foreign exchange market efficiencies in terms of statistics and the fractal market. The JPY exchange market has the fewest multifractal properties, thus indicating that this exchange market has the highest market efficiency among these four exchange markets. The empirical results have implications for the nonlinear mechanism and efficiency in foreign exchange markets, which may help investors effectively manage market risks and benefit a stable global economy.
Highlights
The foreign exchange market, which is a part of the global financial market, is important in regulating international capital flows and promoting the sustainable development of international economy and trade This exchange market is an important mechanism that regulates the relationship between the supply and demand of foreign exchange and that determines exchange rates in the market This market is the microfoundation for effective macroeconomic policies and exchange-rate risk
Modern financial theory is theoretically based on the efficient-market hypothesis (EMH) and the random walk hypothesis (RWH), which both constitute the foundation of financial studies
The empirical result that the MD values of the EUR, GBP, Canadian dollar (CAD) and Japanese yen (JPY) exchange markets fluctuated over time supports the results of Levich, Conlon, and Potı (2019) that the efficiency of foreign exchange markets is dynamically nonlinear, and the inefficiency of these markets may be related to specific times, such as the global financial crisis
Summary
The foreign exchange market, which is a part of the global financial market, is important in regulating international capital flows and promoting the sustainable development of international economy and trade This exchange market is an important mechanism that regulates the relationship between the supply and demand of foreign exchange and that determines exchange rates in the market This market is the microfoundation for effective macroeconomic policies and exchange-rate risk. To test the effects of certain extreme events, i.e., the 2008 global financial crisis and the announcement by the Federal Reserve of its withdrawal from QE in 2014, on the nonlinearity and efficiency of the EUR, GBP, CAD and JPY exchange markets, we specially design a quantitative analysis of the time-varying degree of multifractality and separate the whole sample into three subsamples according to which of the following periods the sample was taken: before the crisis, between the crisis and the Federal Reserve’s announcement, and after the announcement. We study the different effects of the 2008 financial crisis and the Federal Reserve’s policy on nonlinearity and efficiency in the EUR, GBP, CAD and JPY exchange markets for the whole sample and different subsamples.
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