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

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.

► This paper studies the relative efficiency of six CEE foreign exchange markets. The generalized spectral test of Escanciano and Velasco (2006) is used in a rolling window approach. ► We focus on the effects of the recent global economic and financial crisis on the relative efficiency. ► All foreign exchange markets have experienced periods of inefficiency during the first stage of the crisis. ► On the second stage of the crisis, some foreign markets have recovered market efficiency quickly, while the others continue to register a low degree of efficiency.