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

Dao, T. M., McGroarty, F. and Urquhart, A. ORCID: https://orcid.org/0000-0001-8834-4243 (2016) A calendar effect: weekend overreaction (and subsequent reversal) in spot FX rates. Journal of Multinational Financial Management, 37. pp. 158-167. ISSN 1042-444X doi: 10.1016/j.mulfin.2016.11.001

Abstract/Summary

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 over- reaction 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 strat- egy is able to generate abnormal risk-adjusted returns, which suggests that these currency markets might be weak-form inefficient.