Towards an explanation of the Euro FX market reaction in the EU: A review of European integration during the EU crises

Abstract

We review market participants' actions and the EU afterthe introduction of the euro and during the crises period and Brexit process. The crucial factor is the feedback effect in the reactions of the market participants and the EU. The euro was introduced in a compromised monetary union agreement, essentially underlining the European integrative process issues that were highlighted by the euro crises. Hence, for this reason, it is hard to explain the euro crises without referencing the European integration theories. On the other hand, it is difficult to understate the behavioural factors, including greed and fear, in the full explanation of thecrises. At the heart of this research is the introduction of a new model of testing the stability of the market extending the variance bound test of (Fakhry & Richter, 2015) underpinned by a Markov Switching GARCH model. We analyse the stability of the Euro FX Market from 1st January 1999 to 31st December 2019. We found a mixture of over and under reactions defining the three sub-periods which given the Euro heuristic influencing both the market participants’ and EU’s views seem to be an acceptable result. Keywords. Behavioural Finance, EU Integration, Euro, Euro Crises, Long/Short Run, Market Stability. JEL. C51, D81, G01, G02, H77.