Herd Investing and Market Inefficiency in Forex Markets Over the COVID-19 Outbreak: The Multifractality Analysis

Abstract

This study investigates how the coronavirus pandemic influenced the 5-day-week multifractal characteristics of top five foreign exchange rates - USD/EUR, USD/ GBP, CNY/USD, JPY/USD, and CHF/USD - using weekday index data covering the period from 2 January 2018 to 20 July 2022. The major objective is to determine whether herd investing behavior and the degree of market inefficiency changed between the pre-first-lockdown period (2 January 2018–22 March 2020) and the post-first-lockdown period (23 March 2020–20 July 2022). The generalized Hurst exponents are estimated using the multifractal detrended fluctuation analysis (MFDFA). The empirical findings indicate that multifractality is present in each of the examined exchange rates during the COVID-19 outbreak. Moreover, the degree of market inefficiency varies across the selected spot rates. The results further suggest that the post-first-lockdown period was more prone to herd investing for USD/EUR, USD/GBP, and CHF/USD. In addition, based on the MLM (inefficiency) index, empirical evidence reveals that USD/EUR and CHF/USD became more vulnerable in the post-first-lockdown period. Considering the impacts of this far-reaching global shock, the highest MLM (inefficiency) index value is associated with CNY/USD before the first lockdown and with USD/EUR after the first lockdown.