Testing Explosive Bubble for Eurozone Exchange Rate in the COVID-19 Outbreak: Evidence from Recursive Right-Tailed Tests

Year 2020, Volume: 1 Issue: 1, 32 - 45, 31.12.2020

Onur Özdemir

Abstract

This paper investigates the presence of explosive bubbles in financial markets using daily data (5-day weeks) of the closing rate of EUR/USD exchange in the COVID-19 outbreak, covering the period from December 2, 2019 to December 4, 2020. The bubble behavior in the closing rate of EUR/USD exchange is measured by two distinct right-tailed testing procedures. In this vein, the Supremum Augmented Dickey-Fuller (SADF) test developed by Phillips et al. (2011) and the Generalized Supremum Augmented Dickey-Fuller (GSADF) test developed by Phillips et al. (2015) are used to identify multiple bubble periods. The empirical findings imply that positive bubbles are a common feature of the closing rate of EUR/USD exchange in the COVID-19 outbreak. As a critical year, 2020 is identified to point out the importance of explosive bubble behavior, after which estimated statistics by two types of unit-root test procedures provide evidence of ongoing financial instability.

Keywords

Exchange Rate, Bubble Behavior, Financial Instability, COVID-19, Right-Tailed Test

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