An empirical study on the existence of bubbles in major parity price movements

Price bubbles in foreign exchange markets are among the key factors that threaten market stability and economic balance, which can lead to economic fluctuations and irrational investor behavior. This study was conducted to examine the existence of speculative bubbles in price movements in major currency pairs. The study focuses on major currency pairs such as NZD/USD, AUD/USD, EUR/USD, USD/JPY, USD/CHF, GBP/USD and USD/CAD. In econometric analyses, strong empirical evidence for the detection of balloons was presented by using Supremum Augmented Dickey-Fuller (SADF) and Generalized Supremum Augmented Dickey-Fuller (GSADF) tests. The SADF and GSADF tests used in the research are advanced methods developed to detect bubble formations in foreign exchange markets through time series analysis. The SADF test determines the periods when bubble price movements start and end, while the GSADF test provides the opportunity to detect multiple bubble periods. Bubble periods detected by these methods are evaluated by associating them with the economic events and market dynamics of the relevant dates. According to the findings of the study, price bubbles were detected in the EUR/USD pair between the third quarter of 2014 and the second quarter of 2015. In this period, it was observed that the expansionary monetary policies of the European Central Bank and global economic uncertainties had an impact on price movements. In the USD/JPY party, two different bubble periods have been determined. While the first bubble emerged in 2013 under the influence of Japan's Abenomics policies, the second bubble was observed between the last quarter of 2014 and the second quarter of 2015. In the USD/CAD parity, price bubbles were detected between the first quarter of 2015 and the first quarter of 2016, and it was determined that this situation was due to the decline in oil prices and the energy crisis in the Canadian economy. In other pairs (NZD/USD, AUD/USD, USD/CHF and GBP/USD), there was no suggestive evidence of price bubbles. In the discussion part of the study, it was emphasized that the irrational behavior of market participants increases the extreme fluctuations in exchange rates and is effective in the formation of bubbles. In addition, it has been evaluated that macroeconomic policies and monetary policies implemented by central banks may contribute to the formation of bubbles. It has been stated that loose monetary policies may pave the way for speculative movements. In addition, it was concluded that regulatory deficiencies threaten market stability and are insufficient to prevent price bubbles. In the light of the findings obtained from this study, various policy recommendations are presented to understand the causes and effects of price bubbles in foreign exchange markets. First, it was suggested that financial markets should be effectively regulated, and supervisory mechanisms should be strengthened. Addressing regulatory deficiencies and preventing market manipulations play a critical role in mitigating the effects of bubbles in foreign exchange markets. Secondly, it is recommended to increase the financial literacy levels of investors and to raise awareness about the risks of price bubbles. Training programs can contribute to the adoption of more informed strategies by minimizing irrational investment decisions. Thirdly, it was emphasized that early warning systems should be developed and algorithms that can detect balloon formations should be disseminated. AI-based analytics tools can detect market movements more quickly and accurately, providing an effective warning mechanism for investors and regulatory agencies. Finally, it was stated that international cooperation should be increased, and common regulations should be implemented considering the global nature of foreign exchange markets. This study contributes to the literature by examining the existence of price bubbles in major currency pairs and by offering insights aimed at enhancing the stability and efficiency of foreign exchange markets. The methods employed and the findings obtained provide valuable insights into understanding and managing the risks arising from speculative movements. Furthermore, the study serves as a guide for policymakers, regulatory authorities, and investors. The results highlight the necessity of adopting a multidisciplinary approach to ensure market stability and mitigate the effects of price bubbles.