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Equity hedging and exchange rates at the London 4p.m. fix

Author

Listed:
  • Melvin, Michael
  • Prins, John

Abstract

We test the hypothesis that hedging by international equity portfolio managers affects exchange rates—the “hedging channel of exchange rate adjustment”. A key institutional feature of the foreign exchange market, the “London 4p.m. fix”, is used to identify times when hedging trades concentrate. The direction of hedging trades is identified by past equity returns. The findings show that equity market appreciation over the month can be used to predict currency depreciation before the end-of-month fix, providing evidence that hedging activity plays a role in exchange rate determination.

Suggested Citation

  • Melvin, Michael & Prins, John, 2015. "Equity hedging and exchange rates at the London 4p.m. fix," Journal of Financial Markets, Elsevier, vol. 22(C), pages 50-72.
  • Handle: RePEc:eee:finmar:v:22:y:2015:i:c:p:50-72
    DOI: 10.1016/j.finmar.2014.11.001
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    References listed on IDEAS

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    1. 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.
    2. Hau, Harald & Rey, Hélène, 2008. "Global Portfolio Rebalancing Under the Microscope," CEPR Discussion Papers 6901, C.E.P.R. Discussion Papers.
    3. Harald Hau & Hélène Rey, 2006. "Exchange Rates, Equity Prices, and Capital Flows," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 273-317.
    4. Chaban, Maxym, 2009. "Commodity currencies and equity flows," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 836-852, September.
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    Citations

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    Cited by:

    1. Carol Osler & Alasdair Turnbull, 2016. "Dealer Trading at the Fix," Working Papers 101R, Brandeis University, Department of Economics and International Businesss School, revised Jun 2017.
    2. repec:bla:reviec:v:25:y:2017:i:4:p:924-947 is not listed on IDEAS
    3. Michael Moore & Andreas Schrimpf & Vladyslav Sushko, 2016. "Downsized FX markets: causes and implications," BIS Quarterly Review, Bank for International Settlements, December.
    4. repec:bis:bisqtr:1709e is not listed on IDEAS
    5. Kuk Mo Jung, 2017. "Liquidity Risk And Time-Varying Correlation Between Equity And Currency Returns," Economic Inquiry, Western Economic Association International, vol. 55(2), pages 898-919, April.
    6. Gino Cenedese & Richard Payne & Lucio Sarno & Giorgio Valente, 2016. "What Do Stock Markets Tell Us about Exchange Rates?," Review of Finance, European Finance Association, vol. 20(3), pages 1045-1080.
    7. repec:eee:jimfin:v:80:y:2018:i:c:p:75-95 is not listed on IDEAS
    8. Takatoshi Ito & Masahiro Yamada, 2016. "Puzzles in the Forex Tokyo “Fixing”: Order Imbalances and Biased Pricing by Banks," NBER Working Papers 22820, National Bureau of Economic Research, Inc.
    9. repec:eee:jbfina:v:87:y:2018:i:c:p:233-247 is not listed on IDEAS
    10. Takatoshi Ito & Masahiro Yamada, 2015. "Was the Forex Fixing Fixed?," NBER Working Papers 21518, National Bureau of Economic Research, Inc.
    11. Carol Osler, 2016. "Dealer Trading at the Fix," Working Papers 101, Brandeis University, Department of Economics and International Businesss School.
    12. Martin Evans, 2014. "Forex Trading and the WMR Fix," Working Papers gueconwpa~14-14-03, Georgetown University, Department of Economics.
    13. repec:eee:inecon:v:109:y:2017:i:c:p:214-234 is not listed on IDEAS
    14. repec:eee:finlet:v:21:y:2017:i:c:p:157-162 is not listed on IDEAS
    15. Takatoshi Ito & Masahiro Yamada, 2016. "Puzzles in the Tokyo Fixing in the Forex Market: Order Imbalances and Bank Pricing," UTokyo Price Project Working Paper Series 069, University of Tokyo, Graduate School of Economics.

    More about this item

    Keywords

    Exchange rates; Market microstructure; Fixing prices; Order flow; Hedging;

    JEL classification:

    • F3 - International Economics - - International Finance

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