This paper sheds light on a puzzling pattern in foreign exchange markets: Domestic currencies appreciate (depreciate) systematically during foreign (domestic) working hours. These time-of-day patterns are statistically and economically highly significant. They pervasively persist across many years, even after accounting for calendar effects. This phenomenon is difficult to reconcile with the random walk and market efficiency hypothesis. Microstructural and behavioural explanations suggest that the main raison d'etre is a domestic currency bias coupled with market segmentation. The prevalence of domestic (foreign) traders demanding the counterpart currency during domestic (foreign) working hours implies a cyclical net positive (negative) imbalance in dealers' inventory. In aggregate, this turns into sell-price (buy-price) pressure on the domestic currency during domestic (foreign) working hours.
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Paper provided by Swiss National Bank in its series Working Papers with number
2007-3.
Length: 41 pages Date of creation: 30 Apr 2007 Date of revision: Handle: RePEc:ris:snbwpa:2007_003
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data) G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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