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Equity hedging and exchange rates at the London 4p.m. fix

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Listed:
  • Melvin, Michael
  • Prins, John

Abstract

We test the hypothesis that hedging by international equity portfolio managers affects exchange rates—the “hedging channel of exchange rate adjustment”. A key institutional feature of the foreign exchange market, the “London 4p.m. fix”, is used to identify times when hedging trades concentrate. The direction of hedging trades is identified by past equity returns. The findings show that equity market appreciation over the month can be used to predict currency depreciation before the end-of-month fix, providing evidence that hedging activity plays a role in exchange rate determination.

Suggested Citation

  • Melvin, Michael & Prins, John, 2015. "Equity hedging and exchange rates at the London 4p.m. fix," Journal of Financial Markets, Elsevier, vol. 22(C), pages 50-72.
    • Handle: RePEc:eee:finmar:v:22:y:2015:i:c:p:50-72
    DOI: 10.1016/j.finmar.2014.11.001
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    References listed on IDEAS

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    1. Harald Hau & Hélène Rey, 2006. "Exchange Rates, Equity Prices, and Capital Flows," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 273-317.
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    3. Rey, Hélène & Hau, Harald, 2008. "Global Portfolio Rebalancing Under the Microscope," CEPR Discussion Papers 6901, C.E.P.R. Discussion Papers.
    4. Chaban, Maxym, 2009. "Commodity currencies and equity flows," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 836-852, September.
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    More about this item

    Keywords

    Exchange rates; Market microstructure; Fixing prices; Order flow; Hedging;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance

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