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Nonlinear Multiscale Entropy and Recurrence Quantification Analysis of Foreign Exchange Markets Efficiency
1Donlinks School of Economics and Management, University of Science and Technology Beijing, Beijing 100083, China.
Entropy (Basel, Switzerland)
|December 3, 2020
Summary
This study quantifies exchange rate fluctuations using multiscale weighted permutation entropy (MWPE) and recurrence quantification analysis (RQA). Results reveal varying market efficiencies, with Japan
Area of Science:
- Economics
- Financial Markets
- Complexity Science
Background:
- Exchange rate dynamics are significantly influenced by the regularity of price fluctuations.
- Understanding these fluctuations is key to assessing foreign exchange (FX) market efficiency.
Purpose of the Study:
- To quantify the irregular fluctuation behaviors of exchange rates in eight major economies over a decade (2006-2016).
- To compare market efficiency across different economies using nonlinear analytical techniques.
Main Methods:
- Application of multiscale weighted permutation entropy (MWPE) to analyze time series data.
- Utilization of recurrence quantification analysis (RQA) on raw data and intrinsic mode functions (IMFs) derived from empirical mode decomposition.
- Analysis of complexity characteristics to infer market efficiency.
Main Results:
- The Japanese Yen/US Dollar (JPY/USD) and Euro/US Dollar (EUR/USD) markets exhibit higher complexity and efficiency.
- Markets in South Korea, Hong Kong, and China demonstrate lower and weaker efficiency.
- The financial crisis period was associated with enhanced market efficiency in FX markets.
Conclusions:
- Nonlinear methods like MWPE and RQA provide valuable insights into FX market dynamics and efficiency.
- Significant variations in market efficiency exist across different economies.
- External shocks, such as financial crises, can impact and potentially improve FX market efficiency.
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