This paper explores some changes induced on the Romanian foreign exchange market by the global crisis. We study these changes from the perspective of number and intensity of the shocks occurred before and after the global crisis. We found some significant differences, explainable not only by the direct effects of the crisis, but also by the intervention of the National Bank of Romania.Romanian Foreign Exchange Market, Shocks, Global Crisis, Monetary Policy, National Bank of Romania

Dumitriu, Ramona

Stefanescu, Razvan

English

Research Papers in Economics

SHOCKS ON THE ROMANIAN FOREIGN EXCHANGE MARKET  
BEFORE AND AFTER THE GLOBAL CRISIS  
 
DUMITRIU Ramona; 
University “Dunarea de Jos” Galati;  
rdumitriu@ugal.ro 
 
STEFANESCU Razvan; 
University “Dunarea de Jos” Galati;  
rzvn_stefanescu@yahoo.com 
 
 
Abstract 
This paper explores some changes induced on 
the  Romanian  foreign  exchange  market  by 
the  global  crisis.￿ We  study  these  changes 
from the perspective of number and intensity 
of  the  shocks  occurred  before  and  after  the 
global  crisis.  We  found  some  significant 
differences, explainable not only by the direct 
effects  of  the  crisis,  but  also  by  the 
intervention  of  the  National  Bank  of 
Romania. 
 
Key  words:  Romanian  Foreign  Exchange 
Market,  Shocks,  Global  Crisis,  Monetary 
Policy, National Bank of Romania. 
 
JEL classification: G15; G01; G14  
 
1. Introduction 
 
The  shocks  on  a  foreign  exchange  market 
could  have  various  causes:  macroeconomic 
policy measures, political events a.s.o. Such 
sharp changes have a significant impact on 
the international business and on the foreign 
investment (Griffin and Stulz; 2001).  
 
The  exchange  rates  regime  applied  in  a 
country has a major influence on the foreign 
exchange market stability. In Romania, after 
the fall of the communist regime, the foreign 
exchange market was gradually liberalized. 
However,  for  a  long  period  of  time,  the 
National  Bank  of  Romania  (NBR) 
maintained  a  substantial  intervention  in 
order to preserve the foreign exchange rates 
stability.  In  2005  NBR  officially  adopted 
inflation targeting as its monetary strategy. 
This  measure  implied  a  relaxation  of  NBR 
intervention  on  the  foreign  exchange 
market. From 2008 the Romanian financial 
markets,  including  the  foreign  exchange 
market,  were  affected  by  the  global  crisis 
(Figure 1). 
￿
In this paper we study the changes induced 
by the global crisis on the Romanian foreign 
exchange  from  the  perspective  of  number 
and intensity of the shocks occurred in this 
period of time. To our knowledge until now 
there  were  no  attempts  to  analyze  the 
shocks from the Romanian foreign exchange 
during the global crisis. We investigate such 
shocks  using  methods  that  are  in  general 
used to analyze the overreaction on the stock 
markets.  
 
The plan of the paper is as it follows. In the 
next  part  we  approach  the  relevant 
literature. The third part describes the data 
and  the  methodology  used  in  our 
investigation.  The  fourth  part  presents  the 
empirical  results  and  the  fifth  part 
concludes.  
 
 
2. Literature review 
 
The  subject  of  the  shocks  on  the  financial 
markets was approached in many scientific 
papers.  De  Bondt  and  Thaler  (1985) 
analyzed the shocks from the stock markets 
in  their  study  about  the  investors’ 
overreaction  to  the  major  price  changes. 
Such overreaction occurred especially when 
a shock caused the stock prices to move from 
their  normal  levels.  The  overreaction 
hypothesis  was  confirmed  by  the  later 
researches (for example Howe, 1988; Atkins 
and Dyl, 1990; Bremer and Sweeney, 1991; 
Lasfer et al. 2003). 
￿ ￿ ￿ ￿
Clarida  and  Gali  (1994)  studied  the 
macroeconomic shocks impact on the foreign 
exchange  markets.  Eichenbaum  and  Evans (1995) found that monetary policy shocks are 
transferred on the exchange rates. 
 
Eichengreen  et  al  (2009)  found  a  relevant 
influence  of  the  monetary  policy 
characteristics on the foreign exchange rates 
stability. Brenner and Sokoler (2009) studied 
the  Israeli  monetary  policy  and  they 
concluded that inflation targeting should be 
applied in a free floating exchange regime. 
 
Several  studies  found  that  financial  crisis 
often  induced  significant  changes  in  the 
exchange  rate  policy  (for  example  Fama, 
2005). 
 
3. Theoretical Background  
 
In our investigation we  use daily values of 
RON/EUR exchange rates, provided by NBR. 
Our sample of data covers a time period from 
3
rd  January  2005  to  21
st  April  2011.    We 
compute  the  returns  of  the  exchange  rates 
using the equation: 
 
Rt = ln (St) – ln (St-1)               (1) 
 
where: 
-  Rt is the return on the day t; 
-  St is the average exchange rate RON/EUR 
on the day t. 
 
We  split  our  sample  of  data  in  two  sub-
samples: 
-  first  sub-sample,  corresponding  to  a  pre-
crisis period, from 3
rd February  2006 to 15
th 
September 2008 (when it was announced the 
bankruptcy of Lehman Brothers); 
-  second  sub-sample,  corresponding  to  the 
crisis  period,  from  16
th  September  2008  to 
21
st April 2011.   
￿
We  analyze  the  stationarity  of  the  time 
series using the classical Augmented Dickey 
Fuller  (ADF)  test.  We    use  a  graphical 
representation  to  establish  The 
deterministic component of this test will be 
chosen based on a graphical representation, 
while  the  number  of  lags  will  be  chosen 
based on the Akaike Information Criterion. 
 
We  define  the  shocks  on  the  foreign 
exchange  market  employing  a  methodology 
used  by  Lasfer  et  al  (2003).  Thus,  we 
consider that a depreciation (positive) shock 
occurs  in  a  day  t  when  return  exceeds,  by 
two standard deviations, the average market 
daily  return  from  a    [-60;  -10]  time  period 
(from the  previous 60 trading days to the 10 
days  before  the  day  t).  An  appreciation 
(negative)  shock  occurs  in  day  t  when  the 
return  lies  two  standard  deviations  below 
the average market daily return from [-60; -
10]  time  period.  The  standard  deviation  is 
computed,  as  the  average  market  daily 
return, over the [-60; -10] time period. 
 
We  separate  the  identified  shocks  in  two 
categories:  autonomous  shocks  and 
successive  shocks.  An  autonomous  shock  is 
not preceded  by any  other  shock in the 10 
previous  trading  days.  A  successive  shock 
occurs  when  the  time  period  from  the 
precedent shock is less than 10 trading days. 
We classify  the  successive  shocks  based  on 
the nature of precedent shocks. 
 
For each of the two samples we calculate the 
number  and  the  average  return  of  each 
category of shocks. 
 
4. Empirical Results 
 
Table 1 provides the descriptive statistics for 
the returns from the two periods of time. In 
the  pre-crisis  period  of  time  the  average 
return was negative but quite closed to zero. 
During the crisis, when for many months the 
national  currency  tended  to  depreciate, the 
average  return  was  positive.  The  values  of 
standard deviation for the two sub-samples, 
which  reflect  the volatility, are  closed.  The 
Augmented Dickey-Fuller tests indicate the 
stationarity of the two time series. 
￿ ￿ ￿ ￿
The  identified  depreciation  shocks  are 
presented  in  the  Table  2.  It  resulted  the 
number  of  depreciation  shocks  was  much 
lower during the crisis than in the pre-crisis 
period  of  time.  However,  the  successive 
depreciation  shocks  preceded  by  others 
depreciation shocks were more numerous in 
the second sub-sample comparing to the first 
one. The average return of the autonomous 
depreciation  shocks  was  higher  during  the 
crisis  in  comparison  with  the  pre-crisis 
period of time. 
 
In  the  Table  3  there  are  presented  the 
identified  appreciation shocks. The  average 
return  of  the  autonomous  appreciation 
shocks  was  lower  during  the  crisis  than before.  However, in the second sub-sample 
it  was  identified  a  higher  number  of 
successive  appreciation  shocks  than  in  the 
first one. 
 
5. Conclusions and implications 
 
In this paper we identified the shocks on the 
Romanian  foreign  exchange  market  before 
and during the global crisis. For the two sub-
samples  with  the  same  number  of  valid 
observations  we  found  significant 
differences.  It  resulted  that  depreciation 
shocks  were  more  numerous  before  than 
during  the  global crisis.  Almost  half of  the 
depreciation  shocks  from  the  second  sub-
sample  were  preceded  by  appreciation 
shocks. During the crisis more appreciation 
shocks occurred than in the pre-crisis period.  
 
Such differences could be explained by some 
circumstances  of  the  global  crisis  and  by 
some  characteristics  of  NBR  monetary 
policy. Since the beginning of the crisis the 
difficulties  experienced  by  some  countries 
from the Euro  Area led  to  appreciations  of 
the Romanian national currency against the 
euro.  Despite  the  adoption  of  inflation 
targeting  NBR  intervention  on  the  foreign 
exchange  market  is  still  very  active.  The 
decline of the depreciation shocks during the 
global crisis could be linked to NBR concern 
that  a  too  consistent  devaluation  would 
stimulate the inflation. The large number of 
successive shocks is partially a consequence 
of NBR intervention.  
 
The  investigation  about  the  shocks  on  the 
Romanian foreign exchange market could be 
extended  to  other  foreign  currencies.  It 
should be also continued with the analysis of 
the shocks in the context of the global crisis 
future evolution. 
 
References  
 
1. Atkins, Allen B., and Edward, Dyl (1990) Price 
Reversals, Bid-Ask Spreads, and Market 
Efficiency, Journal of Financial and Quantitative 
Analysis 25, 535 - 547. 
2. Benczur, P., Konya, I. (2004) Real effects of 
nominal exchange rate shocks, ESEM Working 
Papers, Budapest. 
3. Bremer, Marc A. and Sweeney, Richard J. 
(1991) The Reversal of Large Stock- Price 
Decreases, Journal of Finance 46, 747-754. 
4. Brenner, M., Sokoler, M. (2009) Inflation 
Targeting and Exchange Rate Regimes: Evidence 
from the Financial Markets, Review of Finance, 
1–17. 
5. Chang, R., Valesco, A. (2000) Exchange Rate  
Policy for Developing Countries, American 
Economic Review 90(2), Papers and Proceedings 
of the 112
th  Annual Meeting of the American 
Economic Association, May, 71-75. 
6. Clarida, R., Gali, J. (1994) Sources of Real 
Exchange Rate Fluctuations: How Important Are 
Nominal Shocks?, Carnegie-Rochester Conference 
Series on Public Policy 41, 1-56. 
7. DeBondt, Werner F. M., and Richard H. Thaler 
(1985) Does the Stock Market Overreact?, Journal 
of Finance 40, 793-805. 
8. Eichenbaum, M., Evans, C. L. (1995) Some 
Empirical Evidence on the Effects of Shocks to 
Monetary Policy on Exchange Rates, The 
Quarterly Journal of Economics 110, 975-1009. 
9. Eichengreen, B., Gullapalli, R. and Panizza, U. 
(2009) Capital account liberalization, financial 
development and industry growth: a synthetic 
view, Department of Public Policy and Public 
Choice – POLIS, Working paper n. 144. 
10. Fane, G. (2005) Post-Crisis Monetary and 
Exchange Rate Policies in Indonesia, Malaysia 
and Thailand, Bulletin of Indonesian Economic 
Studies 41(2), 175-195. 
11. Griffin, J.M. and Stulz, R.M. (2001) 
International Competition and Exchange Rate 
Shocks: A Cross-Country Industry Analysis of 
Stock Returns, Review of Financial Studies 14, 
215 – 241. 
12. Howe, John S (1986) Evidence on Stock 
Market Overreaction, Financial Analysts Journal 
42, 74-77. 
13. Krueger, A.O. (1983) Exchange Rate 
Determination, Cambridge University Press, 
Cambridge. 
14. Lasfer, M. A., Melnik, A., Thomas, D. (2003) 
Stock Price Reaction in Stressful Circumstances: 
An International Comparison, Journal of 
Financial Economics 40. 
15. Woo, W.T. (2000) The Asian Financial Crisis: 
Hindsight, Insight, Foresight, ASEAN Economic 
Bulletin 17, 113-119. 
￿
 
 
 
 
 
  
 
Appendix 
 
Table 1 - Descriptive statistics for the RON/EUR returns from the two sub-samples 
 
                                     Sub-sample 
    Indicator 
3
rd February  2006 –  
15
th September  
2008 
16
th September  2008 –  
21
st April  2011 
Mean  -0.0000004  0.000190823 
Median  -0.000326433  -0.00007 
Minimum  -0.0208098  -0.0254008 
Maximum  0.0229753  0.0292724 
Std. Dev.  0.00456710  0.00449190 
Skewness  0.709426  0.277203 
Ex. Kurtosis  3.11321  8.34037 
Jarque-Bera test  324.333  1935.96 
p- value for Jarque-Bera test  0.0001  0.00001 
Augmented Dickey-Fuller test (1)  -3.07687  -2.64825 
p- value for Augmented Dickey-Fuller test  0.02834  0.08334 
Valid observations  665  665 
Notes: (1) For both sub-samples it was chosen a constant as deterministic term;  
            (2) 53 lags for the first sub-sample and 48 lags for the second sub-sample 
Table 2 - Depreciation (positive) shocks on the returns from the two sub-samples 
 
                                         Sub-sample 
 
Indicator 
3
rd February  2006 
–  
15
th September  
2008 
16
th September 
2008 – 21
st April 
2011 
Number of autonomous depreciation shocks 
 
18  5 
Average  return of autonomous depreciation 
shocks 
0.010778 
 
0.011675 
 
Number of successive depreciation shocks 
preceded by others depreciation shocks 
15  7 
Average  return of successive depreciation shocks 
preceded by others depreciation shocks 
0.010372 
 
0.010044 
 
Number of successive depreciation shocks 
preceded by appreciation shocks 
3  11 
Average  return of successive depreciation shocks 
preceded by appreciation shocks 
0.008789 
 
0.008826 
 
Number of all depreciation shocks 
 
36  23 
Average  return of all depreciation shocks  0.010443  0.009816 
 
 
Table 3 - Appreciation (negative) shocks on the returns from the two sub-samples 
 
                                               Sub-sample 
 
Indicator 
3
rd February  2006 –  
15
th September  2008 
16
th September 
2008 – 21
st April 
2011 
Number of autonomous appreciation shocks 
 
9  8 
Average  return of autonomous appreciation  -0.010458163  -0.00787 shocks     
Number of successive appreciation shocks 
preceded by others appreciation shocks 
7  13 
Average  return of successive appreciation 
shocks preceded by others appreciation shocks 
-0.008563727 
 
-0.00852 
 
Number of successive appreciation shocks 
preceded by depreciation shocks 
6  12 
Average  return of successive appreciation 
shocks preceded by depreciation shocks 
-0.007792568 
 
-0.01147 
 
Number of all appreciation shocks 
 
22  33 
Average  return of all appreciation shocks  -0.009128407 
 
-0.00943 
 
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Figure 1 - Evolution of the monthly RON/EUR exchange rates from January 2005 to March 2011 
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Shocks on the Romanian foreign exchange market before and after the global crisis

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