Foreign Exchange Fixings and Returns Around the Clock

Ingomar Krohn, Philippe Mueller, Paul Whelan

Research output: Working paperResearch

Abstract

This paper documents a new stylised fact in foreign exchange markets: intraday currency returns display prolonged reversals around the major benchmark fixings, characterised by an appreciation of the U.S. dollar pre-fixing and a depreciation thereafter. Tracing returns around the clock, the major fixing during Asian trading hours (Tokyo) and two major fixings during European and U.S. hours (Frankfurt and London) generate a distinct `W' shaped return pattern over the 24-hour trading day. On either side of the reversal, price drifts persist for hours; moreover, they are a systematic feature of the data being present every day of the week, month of the year, and during each of the 20 years in our sample. We argue these findings require two ingredients (i) a structural demand for dollar immediacy at local currency fixing times; and (ii) pre-fix hedging risk management practices by financial intermediaries. Consistent with this conjecture, we show our findings are unique to the U.S dollar numeraire, amplified in states of high anticipated volatility, low liquidity, and that arbitrageurs can exploit these patterns after taking transaction costs into account.
Original languageEnglish
Place of PublicationWarwick
PublisherWarwick Finance Group. Warwick Business School. University of Warwick
Number of pages48
DOIs
Publication statusPublished - Dec 2019
SeriesWBS Finance Group Research Paper

Keywords

  • Foreign-exchange
  • Intraday and overnight returns
  • High-frequency data
  • Corporates
  • Pension funds
  • Insurance companies
  • Intermediation

Cite this

Krohn, I., Mueller, P., & Whelan, P. (2019). Foreign Exchange Fixings and Returns Around the Clock. Warwick Finance Group. Warwick Business School. University of Warwick. WBS Finance Group Research Paper https://doi.org/10.2139/ssrn.3521370