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Segmentation and Time-of-Day Patterns in Foreign Exchange Markets

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  • Angelo Ranaldo

Abstract

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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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2007-03.

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Length: 41 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:snb:snbwpa:2007-03

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Keywords: foreign exchange market; microstructure; behavioural finance; timeof-day patterns; market segmentation; calendar effects; inventory; asymmetric information; high-frequency data;

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References

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Citations

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Cited by:
  1. Lukas Menkhoff & Carol L. Osler & Maik Schmeling, 2010. "Limit-Order Submission Strategies under Asymmetric Information," CESifo Working Paper Series 3054, CESifo Group Munich.
  2. Klee, Elizabeth, 2010. "Operational outages and aggregate uncertainty in the federal funds market," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2386-2402, October.
  3. Francis Breedon & Angelo Ranaldo, 2011. "Intraday patterns in FX returns and order flow," Working Papers 2011-04, Swiss National Bank.
  4. Charles S. Bos, 2008. "Model-based Estimation of High Frequency Jump Diffusions with Microstructure Noise and Stochastic Volatility," Tinbergen Institute Discussion Papers 08-011/4, Tinbergen Institute.
  5. Kodongo, Odongo & Ojah, Kalu, 2011. "Foreign exchange risk pricing and equity market segmentation in Africa," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2295-2310, September.
  6. King, Michael & Sarno, Lucio & Sojli, Elvira, 2010. "Timing exchange rates using order flow: The case of the Loonie," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2917-2928, December.

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