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

Thong M. Dao, Frank McGroarty and Andrew Urquhart

Journal of Multinational Financial Management, 2016, vol. 37-38, 158-167

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.

Keywords: Calendar effect; Overreaction; Weekend effect; Market inefficiency; Exchange rates (search for similar items in EconPapers)
JEL-codes: F31 G02 G14 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:37-38:y:2016:i::p:158-167

DOI: 10.1016/j.mulfin.2016.11.001

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