Market Efficiency in Foreign Exchange Markets

TL;DR

This study assesses the efficiency of global foreign exchange markets using approximate entropy to measure randomness, revealing higher efficiency in more liquid markets and significant changes post-crisis.

Contribution

It applies approximate entropy to compare market efficiency across countries and periods, highlighting liquidity and crisis impacts on efficiency.

Findings

European and North American markets have higher ApEn values than African and Asian markets.

Asian markets' ApEn increased significantly after the currency crisis.

Markets with higher liquidity tend to be more efficient.

Abstract

We investigate the relative market efficiency in financial market data, using the approximate entropy(ApEn) method for a quantification of randomness in time series. We used the global foreign exchange market indices for 17 countries during two periods from 1984 to 1998 and from 1999 to 2004 in order to study the efficiency of various foreign exchange markets around the market crisis. We found that on average, the ApEn values for European and North American foreign exchange markets are larger than those for African and Asian ones except Japan. We also found that the ApEn for Asian markets increase significantly after the Asian currency crisis. Our results suggest that the markets with a larger liquidity such as European and North American foreign exchange markets have a higher market efficiency than those with a smaller liquidity such as the African and Asian ones except Japan.