Day-of-the-week effect of major currency pairs: new evidences from investors’ fear gauge

Abstract

Extensive studies have been done on the day-of-the-week effect in currency markets using the spot or future prices. Surprisingly, no literature is available on the day-of-the-week effect, considering the gauge of investors’ fears, that is, implied volatility. In this study, we attempted to analyze the day-of-the-week effect in the context of implied volatility for the currency markets. An analysis of most heavily traded currency pairs was carried out using implied volatility data for 10 pairs with respect to spot rates. An empirical analysis was carried out using the compound of univariate generalized autoregressive conditional heteroscedasticity methods on each currency pair. The principal findings of this study are the presence of the Monday effect in the fear sentiments for all the currency pairs, denoting high positive returns with substantial value, and the Friday effect displaying negative returns. The variance of fear gauge observed for Mondays was positive and for Fridays was negative. However, the spot rate did not replicate the same effects as depicted by implied volatility. The analysis of the day-of-the-week effect of returns in the context of implied volatility validated the existence of the Monday effect and the Friday effect for the currency pairs under study.