The January effect in the foreign exchange market: Evidence for seasonal equity carry trades

Eric Girardin (1) , Fatemeh Salimi Namin (1)

1 AMSE - Aix-Marseille Sciences Economiques

In this study, we investigate monthly seasonality in the foreign exchange market. Given the well-known recurrent higher returns in some month than in others in stock markets around the world, we consider it likely that a seasonal outperformance of a country's stock market over another is associated with similar seasonal patterns in capital flows and exchange rates. A seasonal profit (carry trade) opportunity can be created by the simultaneous appreciation of a country's currency and the outperformance of its stock market. By focusing on the world's key currency pairs, the US dollar-Deutsche mark and the US dollar-euro, and by using a Markov-switching framework, we document persistent January and December effects in the foreign exchange market from 1971 to 2017. Analysis of the German-US stock returns differential and their bilateral capital flows reveal similar month effects in 65% of the whole sample.

Mots clés: seasonality; month effect; foreign currency market; UEP; Markov-switching; carry trade

Domaines: Economies et finances

Eric Girardin, Fatemeh Salimi Namin. The January effect in the foreign exchange market: Evidence for seasonal equity carry trades. Economic Modelling, 2019, 81, pp.422-439. ⟨10.1016/j.econmod.2019.07.021⟩. ⟨hal-02314156⟩