The Effects of Russia's 2022 Invasion of Ukraine on Global Markets: An Analysis of Particular Capital and Foreign Exchange Markets

Introduction

On February 21, 2022, Putin recognized the Donetsk People's Republic and the Lugansk People's Republic, two self-proclaimed regions as states, controlled by pro-Russian separatists in Donbas. The next day, the Russian Federation Council unanimously authorized the use of military force and Russian troops entered both territories. On February 24, Putin announced a “special military operation,” supposedly to “demilitarize” and “denazify” Ukraine. Minutes later, missiles struck sites across Ukrainian territory, including Kiev, the capital. The Ukrainian Border Guard reported attacks on border crossings with Russia and Belarus.

Shortly thereafter, Russian ground forces entered Ukraine. The unwarranted Russian invasion of Ukraine on February 24, 2022 having had dire consequences on the global economy, several analysts have called the invasion the largest military invasion in Europe since World War II (Bloomberg, 2022).

The weak efficient market hypothesis states that it is not possible to predict future prices based on historical prices. The author Rosenthal (1983) advocates that if a market is efficient in its weak form, then there should be no linear dependence between lagged returns both in the statistical sense (absence of autocorrelation) and in the economic sense (absence of positive returns after transaction costs are considered).

The efficient market hypothesis (EMH) is one of the most important economic and financial hypotheses tested over the past century. Due to many abnormal phenomena and conflicting evidence, also known as anomalies against EMH, some scholars have questioned whether the EMH hypothesis is valid and pointed out that the financial literature has substantial evidence of anomalies, so that many theories have been developed to explain some anomalies (Dias et al, 2020; Dias et al., 2021; Dias, Alexandre, et al., 2021; Dias, Heliodoro, Alexandre, et al., 2020; Dias, Heliodoro, Teixeira, et al., 2020; Dias, Santos, et al., 2021; Dias and Santos, 2020; Santos et al., 2021; Vasco et al., 2021).

In recent decades it was realized that speculation is part of the price discovery process and that efforts to reduce speculation significantly reduce informational efficiency in the capital and foreign exchange markets. In light of these events this research will test efficiency, in its weak form, in the capital markets of Germany (DAX), USA (Dow Jones), France (CAC 40), UK (FTSE 100), Italy (FTSE MIB), Russia (MOEX), Japan (NIKKEI 225), Canada (S&P TSX), China (Shanghai and Shenzhen), as well as Rouble/Canadian Dollar, Rouble/Euro, Rouble/Swiss Franc, Rouble/UK, Rouble/US exchange rates for the period January 2, 2017 to May 6, 2022. To conduct this analysis, different approaches were undertaken to assess whether the 2020 and 2022 events impacted in the efficiency of the capital and foreign exchange markets under analysis. The results suggest that the global pandemic of 2020 and the Russian invasion of Ukraine in 2022 had adverse effects on the memory properties of these financial markets, and so, the random walk hypothesis is rejected in all markets, except in the Russian and Chinese capital markets. These findings allow us to evidence the existence of high levels of arbitrage, but the analysis of abnormal returns without incurring in additional risk was not the object of this study.