Synthetic Trades and Calendar Day Patterns: The Case of the Dollar/Sterling Markets

Janet S Thatcher and Lloyd P Blenman

The Financial Review, 2001, vol. 36, issue 2, 177-99

Abstract: Significant day of the week patterns are shown to exist in the dollar/sterling market. These patterns are associated with the returns to synthetic and actual forward trades as well as to spot trades. These trading strategies, geared to buying or selling sterling, reflect different timing, if not valuation, considerations on the part of traders. Nevertheless, pronounced calendar patterns are observed on Wednesdays for all the trading strategies evaluated. This is attributable to significantly different risks on Wednesdays. The observed end-of-the-week patterns in forward returns persist and reinforce the returns at the start of the next week of trading. Furthermore, the overall returns to forward speculation on Fridays and Mondays are of opposite sign. Our results on calendar day patterns are thus supported by both parametric and non-parametric tests. We provide evidence that the frequency of synthetic trading opportunities is inversely related to maturity. We also find that the period of market turbulence analyzed did not trigger abnormal opportunities for covered interest arbitrage. Copyright 2001 by MIT Press.

Date: 2001
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