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

A calendar effect: weekend overreaction (and subsequent reversal) in spot FX rates
A calendar effect: weekend overreaction (and subsequent reversal) in spot FX rates
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.
1042-444X
158-167
Dao, Thong
f3e73ed8-7d99-4f3e-96c2-c966e10541cf
Mcgroarty, Frank
693a5396-8e01-4d68-8973-d74184c03072
Urquhart, Andrew
ee369df1-95b5-4cdf-bc24-f1be77357c03
Dao, Thong
f3e73ed8-7d99-4f3e-96c2-c966e10541cf
Mcgroarty, Frank
693a5396-8e01-4d68-8973-d74184c03072
Urquhart, Andrew
ee369df1-95b5-4cdf-bc24-f1be77357c03

Dao, Thong, Mcgroarty, Frank and Urquhart, Andrew (2016) A calendar effect: weekend overreaction (and subsequent reversal) in spot FX rates. Journal of Multinational Financial Management, 37-38, 158-167. (doi:10.1016/j.mulfin.2016.11.001).

Record type: Article

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.

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More information

Accepted/In Press date: 1 November 2016
e-pub ahead of print date: 6 November 2016
Published date: December 2016
Organisations: Centre of Excellence for International Banking, Finance & Accounting

Identifiers

Local EPrints ID: 402301
URI: http://eprints.soton.ac.uk/id/eprint/402301
DOI: doi:10.1016/j.mulfin.2016.11.001
ISSN: 1042-444X
PURE UUID: f4c93403-bd58-4aa0-9eb7-e2fa8a2ac01d
ORCID for Frank Mcgroarty: ORCID iD orcid.org/0000-0003-2962-0927
ORCID for Andrew Urquhart: ORCID iD orcid.org/0000-0001-8834-4243

Catalogue record

Date deposited: 07 Nov 2016 13:28
Last modified: 15 Mar 2024 06:02

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Contributors

Author: Thong Dao
Author: Frank Mcgroarty ORCID iD
Author: Andrew Urquhart ORCID iD

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