[The Efficient Market Hypothesis and the Current EU Financial Crisis]

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ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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ABSTRACT

This paper applies the foreign exchange market efficiency argument to post 1991 European Union by employing a GARCH Model approach. The regression tests are carried out for a full sample panel data, covering the 21 June 1991 to 21 June 2011 time span, of 5224 observations for spot (conversely forward) nominal exchange rates. Moreover, a European pre-peg sub-period (21 June 1991 to 21 June 2011) was also used for comparative purposes. The paper includes different testing procedures. In addition to the evidence obtained from the across-country study, co integration tests were performed in order to re-examine within-country co-movements between forward and future spot exchange rates. The test results generally support the market efficiency hypothesis.

TABLE OF CONTENTS

ACKNOWLEDGEMENT2

DECLARATION3

ABSTRACT4

CHAPTER 1: INTRODUCTION6

CHAPTER 2: LITERATURE REVIEW11

The Euro and the Financial Crisis16

CHAPTER 3: METHODOLOGY AND DATA19

Co integration test26

Can We Understand The Recent Moves Of The Euro-Dollar Exchange Rates?27

Currency exchange rates in the management of the economic crisis31

CHAPTER 5: CONCLUSIONS34

REFERNECES35

CHAPTER 1: INTRODUCTION

Understanding the way in which European foreign exchange markets have evolved in the aftermath of the 1997 and 2008 crisis is imperative to policy makers, - given the new impetus towards monetary integration in the region -, as well as to economic agents (i.e. traders) in search of perfect information. This study provides some preliminary results pertaining to the post-crisis foreign exchange market behaviour in European countries by testing the efficient foreign exchange market argument, which was put forward by Fama (1965). A market is defined as being efficient if the price of an asset Pt equals the optimal forecast of it, i.e. if it equals, where is the present value of prices accruing in the future, and where Et corresponds to the mathematical expectation conditional on all information available at time (t).2 The idea is that any surprising movement in the market must be explained by additional information about ([Copeland, 1994] and [Shiller, 2003]). Under the assumptions that there are n well informed and profit maximizing market participants and that investors are risk neutral, the above stated definition suggests that in an efficient market where all available information at time (t) is fully reflected in an asset price, there are no unexploited opportunities for profits.

In this research, we suggest an application of the efficient market concept to the case of foreign exchange rate markets in the European region, by using GARCH tests applied to the price of foreign currencies The paper is structured as follows: while Section 2 discusses the concept of market efficiency as dealt with in the literature, ...