The Return of the Monday Effect in European Currency Markets: An Empirical Analysis of the Impact of the Economic Crisis on Market Efficiency

• Date: 01 July 2016
• Author: Peter J. Bush,John E. Stephens
• DOI: http://doi.org/10.1002/ijfe.1534
• Published date: 01 July 2016

THE RETURN OF THE MONDAY EFFECT IN EUROPEAN CURRENCY

MARKETS: AN EMPIRICAL ANALYSIS OF THE IMPACT OF THE

ECONOMIC CRISIS ON MARKET EFFICIENCY

PETER J. BUSH and JOHN E. STEPHENS*

,†

University of Michigan, Flint, MI, USA

ABSTRACT

This paper examines the relationship of multiple currencies, coupled with the Euro, to examine if there is evidence of the return

of the Monday effect as a result of the recent global economic crisis. Each currency pair, which consists of the US dollar, Jap-

anese yen, Great British pound, Canadian dollar, and Australian dollar, is compared with the Euro to find evidence to support the

presence of the Monday effect. The currency pairs are tested in 1999–2004 as the first time period, again in 2005–2009 as the

second time period, and then finally in 2010–2012 as the final time period, which represents the period impacted by the eco-

nomic crisis. It is the authors’contention that the economic crisis that occurred after 2008 had a significant impact in the cur-

rency markets and that the Monday effect has become more pronounced because of a weakening of market efficiency.

The results provide evidence that in the 2010–2012 period three currency pairs exhibit a statistically significant Monday ef-

fect. This Monday effect was not evident in either the 1999–2004 or the 2005–2009 periods, according to our analysis. This

leads the authors to postulate that the economic crisis resulting from the mortgage meltdown has had a statistically verifiable

effect on currency markets throughout the world. Copyright © 2015 John Wiley & Sons, Ltd.

Received 11 June 2013; Revised 09 August 2015; Accepted 09 September 2015

KEY WORDS: Monday effect; currency; markets; efficiency; economic crisis

1. INTRODUCTION

A significant amount of literature has been developed examining the nuances of market efficiency, and as a result of

these studies, a number of anomalies have been uncovered. This study focuses on one such potential market anom-

aly, the Monday effect, and attempts to verify its existence in multiple Euro-based currency pairs over the entire

period of existence of the Euro currency from 1999 through 2012. The attempt to verify the existence of the Mon-

day effect is of great interest and importance because its existence is precluded by one of the most fundamental

propositions in finance—the Efficient Market Hypothesis.

The following paper will examine the existence of the Monday effect in the relationship of the US dollar, Aus-

tralian dollar, Canadian dollar, Japanese yen, and Great British pound, against the Euro. The time periods to be ex-

amined are from 1999–2004, 2005–2009, and 2010–2012. The three time periods were chosen because of the

disappearance of the Monday effect in the first part of the 21st century, which has been proven in multiple studies,

in order to test for the potential reappearance of the effect after the financial crisis that began in 2008. The Euro is

used as the common currency because of its wide spread use as a currency for foreign transactions and its relative

efficiency in the market for currency trading.

A brief history of the Euro reveals that the currency was created as a result of the development of the European

Union and the treaty that was signed in 1992, which is now known as the Maastricht Treaty. Although the currency

was created in 1999, it only circulated in banks and government institutions in the early years and did not become a

public currency until 2002, when it started to be distributed by the 12 member countries to the broader public

(European Central Bank).

*Correspondence to: John E. Stephens, Lecturer of Finance, University of Michigan –Flint, Flint, MI 48502.

†

E-mail: johstep@umflint.edu

Copyright © 2015 John Wiley & Sons, Ltd.

International Journal of Finance & Economics

Int. J. Fin. Econ. 21: 241–246 (2016)

Published online 15 October 2015 in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/ijfe.1534