European foreign exchange market efficiency: Evidence based on crisis and noncrisis periods

This study investigates the impact on foreign exchange market efficiency of the 1992 European financial market crisis by studying precrisis, crisis, and postcrisis periods. Long-term relationships among European currency values are identified during the three periods, although the relationships are not stable during the precrisis and the postcrisis periods. These results may be due to one or more of the following: (1) market inefficiency, (2) a risk premium, or (3) common policy guidelines for European monetary system (EMS) members. Evidence of market inefficiency is strong. Forecasting results demonstrate better performance by an error correction model (ECM) than by a random walk model (RWM) for the British pound and German mark, while results for the French franc and Italian lira are mixed. Dominance tests using Granger causality indicate only weak German mark dominance both in the short and long run.