Segmentation and Time-of-Day Patterns in Foreign Exchange Markets

Angelo Ranaldo



JEL classification
F31, G10, G14, G15

foreign exchange market, microstructure, behavioural finance, time-of-day patterns, market segmentation, calendar effects, inventory, asymmetric information, high-frequency data


This paper sheds light on a puzzling pattern in foreign exchange markets: Domestic currencies appreciate (depreciate) systematically during foreign (domestic) working hours. These time-of-day patterns are statistically and economically highly significant. They pervasively persist across many years, even after accounting for calendar effects. This phenomenon is difficult to reconcile with the random walk and market efficiency hypothesis. Microstructural and behavioural explanations suggest that the main raison d'etre is a domestic currency bias coupled with market segmentation. The prevalence of domestic (foreign) traders demanding the counterpart currency during domestic (foreign) working hours implies a cyclical net positive (negative) imbalance in dealers' inventory. In aggregate, this turns into sell-price (buy-price) pressure on the domestic currency during domestic (foreign) working hours.