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Intraday patterns in FX returns and order flow

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  • Francis Breedon
  • Angelo Ranaldo

Abstract

Using 10 years of high-frequency foreign exchange data, we present evidence of time-of-day effects in foreign exchange returns through a significant tendency for currencies to depreciate during local trading hours. We confirm this pattern across a range of currencies and find that, in the case of EUR/USD, it can form a simple, profitable trading strategy. We also find that this pattern is present in order flow and suggest that both patterns relate to the tendency of market participants to be net purchasers of foreign exchange in their own trading hours. Data from alternative sources appear to corroborate that interpretation.

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File URL: http://www.snb.ch/n/mmr/reference/working_paper_2011_04/source/working_paper_2011_04.n.pdf
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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2011-04.

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Length: 28 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:snb:snbwpa:2011-04

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Keywords: foreign exchange; microstructure; order flow; liquidity;

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References

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  1. Rasmus Fatum & Michael M. Hutchison, . "Is Sterilized Foreign Exchange Intervention Effective After All? An Event Study Approach," EPRU Working Paper Series 99-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  2. Menzie D. Chinn & Michael J. Moore, 2008. "Private Information and a Macro Model of Exchange Rates: Evidence from a Novel Data Set," NBER Working Papers 14175, National Bureau of Economic Research, Inc.
  3. Stavros Panageas & Janice C. Eberly & Andrew B. Abel, 2011. "Optimal Inattention to the Stock Market with Information Costs and Transactions Costs," 2011 Meeting Papers 102, Society for Economic Dynamics.
  4. Mende, Alexander & Menkhoff, Lukas, 2006. "Profits and Speculation in Intra-Day Foreign Exchange Trading," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-339, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  5. Angelo Ranaldo, 2007. "Segmentation and Time-of-Day Patterns in Foreign Exchange Markets," Working Papers 2007-03, Swiss National Bank.
  6. Breedon, Francis & Vitale, Paolo, 2004. "An Empirical Study of Liquidity and Information Effects of Order Flow on Exchange Rates," CEPR Discussion Papers 4586, C.E.P.R. Discussion Papers.
  7. Harald Hau & Massimo Massa & Joel Peress, 2010. "Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1681-1717, April.
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Cited by:
  1. Francis Breedon & Dagfinn Rime & Paolo Vital, 2010. "A Transaction Data Study of the Forward Bias Puzzle," Working Paper 2010/26, Norges Bank.

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