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A calendar effect: Weekend overreaction (and subsequent reversal) in spot FX rates

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  • Dao, Thong M.
  • McGroarty, Frank
  • Urquhart, Andrew

Abstract

This paper investigates a calendar effect, namely the weekend overreaction, in spot foreign exchange markets of 8 major and 9 emerging currencies. We find that after a large price difference between Friday close and subsequent Monday open, most markets are likely to reverse in multiple horizons during the following week, which is consistent with the overreaction hypothesis. We develop a reversal trading strategy to exploit this effect which we show are robust to transaction costs and interest rates. In the out-of-sample test, the strategy is able to generate abnormal risk-adjusted returns, which suggests that these currency markets might be weak-form inefficient.

Suggested Citation

  • Dao, Thong M. & McGroarty, Frank & Urquhart, Andrew, 2016. "A calendar effect: Weekend overreaction (and subsequent reversal) in spot FX rates," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 158-167.
    • Handle: RePEc:eee:mulfin:v:37-38:y:2016:i::p:158-167
    DOI: 10.1016/j.mulfin.2016.11.001
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    More about this item

    Keywords

    Calendar effect; Overreaction; Weekend effect; Market inefficiency; Exchange rates;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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