Foreign exchange rate entropy evolution during financial crises

• We examine the effects of financial crisis on foreign exchange markets.
• The evolution of Shannon entropy is measured for eighteen foreign exchange rates.
• Financial crisis are associated with significant increase of exchange rate entropy.
• Periods of economic uncertainty are preceded by periods of low entropy values.

This paper examines the effects of financial crises on foreign exchange (FX) markets, where entropy evolution is measured for different exchange rates, using the time-dependent block entropy method. Empirical results suggest that financial crises are associated with significant increase of exchange rate entropy, reflecting instability in FX market dynamics. In accordance with phenomenological expectations, it is found that FX markets with large liquidity and large trading volume are more inert — they recover quicker from a crisis than markets with small liquidity and small trading volume. Moreover, our numerical analysis shows that periods of economic uncertainty are preceded by periods of low entropy values, which may serve as a tool for anticipating the onset of financial crises.