Foreign Exchange Fixings and Returns Around the Clock

49 Pages Posted: 11 Feb 2020

See all articles by Ingomar Krohn

Ingomar Krohn

Copenhagen Business School - Department of Finance

Philippe Mueller

Warwick Business School Finance Group

Paul Whelan

Copenhagen Business School

Date Written: January 17, 2020

Abstract

This paper documents a new stylised fact in foreign exchange markets: intraday currency returns display prolonged reversals around the major benchmark fixings, characterised by an appreciation of the U.S. dollar pre-fixing and a depreciation thereafter. Tracing returns around the clock, the major fixing during Asian trading hours (Tokyo) and two major fixings during European and U.S. hours (Frankfurt and London) generate a distinct `W' shaped return pattern over the 24-hour trading day. On either side of the reversal, price drifts persist for hours; moreover, they are a systematic feature of the data being present every day of the week, month of the year, and during each of the 20 years in our sample. We argue these findings require two ingredients (i) a structural demand for dollar immediacy at local currency fixing times; and (ii) pre-fix hedging risk management practices by financial intermediaries. Consistent with this conjecture, we show our findings are unique to the U.S dollar numeraire, amplified in states of high anticipated volatility, low liquidity, and that arbitrageurs can exploit these patterns after taking transaction costs into account.

Keywords: foreign-exchange, intraday and overnight returns, high-frequency data, corporates, pension funds, insurance companies, intermediation

JEL Classification: F30, F31, G15,

Suggested Citation

Krohn, Ingomar and Mueller, Philippe and Whelan, Paul, Foreign Exchange Fixings and Returns Around the Clock (January 17, 2020). WBS Finance Group Research Paper. Available at SSRN: https://ssrn.com/abstract=3521370 or http://dx.doi.org/10.2139/ssrn.3521370

Ingomar Krohn (Contact Author)

Copenhagen Business School - Department of Finance

Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

Philippe Mueller

Warwick Business School Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

Paul Whelan

Copenhagen Business School ( email )

Copenhagen Business School
Finance Department
Copenhagen, DC 1854
Denmark

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