NAŠE GOSPODARSTVO / 
OUR ECONOMY

Market Efficiency of Euro Exchange Rates and Trading Strategies

Mile Bošnjak, Ivan Novak, Davor Vlajčić

Abstract


This paper tests the hypothesis on market efficiency for returns on the euro
against fifteen currencies while assuming predictability of returns, dependent
on the sign and magnitude of endogenous shocks. Considering the properties
of exchange rate returns, the quantile autoregression approach was selected
in empirical analysis. Based on the research data sample, consisting of daily
exchange rates between January first, 1999, and April thirty, 2020, the paper
suggests profitable trading strategies depending on a currency pair. In the case
of six out of fifteen currency pairs, exchange rate returns were found nonpredictable
or almost non-predictable. In the case of nine considered currency
pairs, there was a significant linkage between current and past exchange rate
returns, found as dependent on the sign and magnitude of endogenous shocks
in exchange rate returns. Finally, the paper considered possible factors of
inefficiency and suggested further research of the topic.


Keywords


quantile autoregression, market efficiency, foreign exchange, euro

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