Time-of-Day Pattern and Long Memory Volatility in High Frequency Foreign Exchange Rates across Trading Time Zones

By using the 1-hour EUR/USD, JPY/EUR and JPY/USD high frequency exchange rates, this paper presents two important features of the high frequency exchange rates across different trading time zones in FX markets: time-of-day pattern and long memory volatility. First, this paper finds statistical evidence of the time-of-day pattern in the 4-hour period returns of the high frequency exchange rates across the time zones through the significant tendency for the currency to depreciate (appreciate) during domestic (foreign) trading hours across the time zones. Then, this paper employs the FIGARCH model and the Local Whittle method to estimate the long memory volatility of the 4-hour period returns and shows that the long memory volatilities of the 4-hour period returns appear to be different across the time zones and only market specific. Also, this study presents that the time-of-pattern and the long memory volatility in the 4-hour period returns across the time zones could be explained quite well by the theories of the asymmetric information and the liquidity effect in FX markets.