How Do Currency Markets Interact? Evidence from the Yen-Dollar Exchange Rates in Tokyo, London, and New York

Journal of the Academy of Finance, Vol. 3, No. 2, pp. 173-187, 2005

15 Pages Posted: 13 Dec 2005

See all articles by Ingyu Chiou

Ingyu Chiou

Eastern Illinois University

James Jordan-Wagner

Eastern Illinois University

Hai-Chin Yu

Chung Yuan Christian University

Abstract

This paper studies how one currency market affects another currency market in a different time zone, using various contracts of the opening and closing yen-dollar exchange rates traded in Tokyo, London, and New York. We find strong and consistent evidence that the three major currency markets interact significantly. For each of five contracts we examine, Tokyo leads London and New York, London leads New York and Tokyo, and New York leads Tokyo and London. In particular, the causality relationship is much stronger when one market trades right after another. Although our results show violations of market efficiency, these findings cannot be interpreted as the existence of easy arbitrage opportunities among three markets. Instead, these strong causality relationships may be due to some unique characteristics of each of three currency markets, which cannot be observed directly.

Keywords: Price Transmission, Exchange Rate, Financial Market, Causality.

JEL Classification: F31, F15, P33, N24, N25, N22

Suggested Citation

Chiou, Ingyu and Jordan-Wagner, James M. and Yu, Hai-Chin, How Do Currency Markets Interact? Evidence from the Yen-Dollar Exchange Rates in Tokyo, London, and New York. Journal of the Academy of Finance, Vol. 3, No. 2, pp. 173-187, 2005, Available at SSRN: https://ssrn.com/abstract=839004

Ingyu Chiou (Contact Author)

Eastern Illinois University ( email )

Charleston, IL 61920-3099
United States

James M. Jordan-Wagner

Eastern Illinois University ( email )

Lumpkin College of Business & Applied Science 600 Lincoln Avenue
Charleston, IL 61920
United States
271-581-6931 (Phone)
271-581-6247 (Fax)

Hai-Chin Yu

Chung Yuan Christian University ( email )

22 Pu-Jen,Pu-chung Li
Chung-Li, Taiwan 32023
Taiwan
886 3 265 5209 (Phone)
886 3 265 5299 (Fax)