Market efficiency and cointegration of spot exchange rates during periods of economic turmoil: Another look at European and Asian currency crises

This study extends the study of foreign exchange market efficiency. It employs several verification testing procedures, rather than using only standard Johansen tests, to re-examine if cointegration among different spot exchange rates is actually present during the 1992–1993 European currency crisis and during the 1997–1998 Asian currency crisis. In contrast to the findings in prior studies, the test results collectively cast strong doubts on the presence of cointegration. Therefore, a cointegration test may not be an appropriate technique to detect and reveal market inefficiency if it in fact transpires during these two crises. Further, this study strongly corroborates empirical evidence that the reliance on Johansen tests can result in spurious findings of cointegration and thus incorrect inferences about efficiency.