Foreign Exchange Markets Efficiency Under Recent Crises: Evidence from the European Markets

Abstract

This study investigates the European foreign exchange markets efficiency from both the within- and across-country perspectives and subsequently compared them across several recent crises. The European foreign exchange markets are generally efficient over the whole sample period. From the subsample periods analysis, September 11, 2001 event is shown to be the most disturbing event among recent crises. Surprisingly, there is little evidence of disturbance to foreign markets efficiency during the two most recent major crises namely the global financial crisis of 2008/09 and the current European Sovereign Debt Crisis (ESDC). The forward bias puzzle remains a more prominent phenomenon among the advanced countries' currencies than their developing counterparts. There is also evidence showing the convergence in the efficiency condition between the European advanced and developing countries‟ currencies in the later subsample periods. There are three key contributions; one, we have updated the literature until the recent ESDC; two, our results provide comfort to policymakers that the European foreign exchange markets efficiency is least affected by the recent crises; and three, our conclusions support the notion of market efficiency in the long run.