Calendar Anomalies

The day-of-the-week effect and the turn-of-the-month effect in the

BRICS foreign exchange markets.

Stefanie Buffing 1812556; s.buffing@student.vu.nl

Supervised by Dr. P.A. Stork

Master Thesis Finance

Vrije Universiteit Amsterdam, June 2012

Abstract

In this paper we focus on the development of calendar anomalies in the foreign exchange markets of
emerging markets. Based on both the OLS regression model and the EGARCH (1,1) regression model
we investigate the existence of the day-of-the-week effect and the turn-of-the-month effect in the
BRICS-US foreign exchange markets and in the relating cross-currency exchange markets, during the
period 2001-2012. By comparing the coefficients of the dummy variables we investigate whether the
returns significantly differ from each other. Estimation results show that both the day-of-the-week
effect and the turn-of-the-month effect exist in some of the BRICS-US exchange rates and their cross-
currency exchange rates during the 2001-2012 period. Finally, it becomes clear that by investing in the
cross-currency exchange rates with the Chinese Yuan as home-currency (while taking into account the
transaction costs of rebalancing the portfolio) the international trader realizes the highest average
returns and the highest Sharpe ratio, so that the investor is best compensated for the undertaken risk.

Keywords: Calendar anomalies; DOW effect; TOM effect; BRICS foreign exchange markets;
EGARCH (1,1)
Index
Introduction p. 4

I Theoretical Framework p. 7
1. Market Efficiency p. 7
1.1 Efficient Market Hypothesis p. 7
1.2 Anomalies: calendar effects p. 8
1.2.1 Day-of-the-week effect p. 9
1.2.2 Turn-of-the-month effect p. 10
2. Emerging markets p. 12
2.1 BRICS countries p. 12
2.2 BRICS characteristics p. 13
2.2.1 Similarities and differences in BRICS characteristics p. 14
3. The foreign exchange market p. 16
3.1 Global foreign exchange market turnover p. 16
3.2 BRICS foreign exchange markets p. 17
3.2.1 The BRICS foreign exchange markets’ structure p. 18
3.3 Foreign exchange rate fluctuations p. 20
3.3.1 Purchasing Power Parity p. 21
3.3.2 (Un)covered interest rate parity p. 22
3.3.3 BRICS-Dollar exchange rates p. 23
3.3.4 Cross-currency exchange rates of the BRICS p. 24

II Empirical study p. 25
1. Empirical research p. 25
1.1 Research methodology p. 25
1.1.1 OLS methodology p. 26
1.1.2 EGARCH (1,1) methodology p. 27
1.2 Data p. 29
1.2.1 The dataset p. 29
1.2.2 Data descriptive p. 30
2. Empirical results p. 32
2.1 The OLS regression model p. 33
2.1.1 BRICS-US Dollar DOW effect p. 33
2.1.2 BRICS-US Dollar TOM effect p. 35
2.1.3 Cross-currency exchange rates DOW effect p. 36
2.1.4 Cross-currency exchange rates TOM effect p. 37
2.2 The EGARCH (1,1) regression model p. 38
2.2.1 BRICS-US Dollar DOW effect p. 38
2.2.2 BRICS-US Dollar TOM effect p. 40
2.2.3 Cross-currency exchange rates DOW effect p. 41
2.2.4 Cross-currency exchange rates TOM effect p. 45

2
 2.3. OLS vs. EGARCH (1,1) results p. 48
3. Optimal investment strategies p. 51
3.1 Investment strategy without transaction costs p. 51
3.2 Investment strategy with transaction costs p. 53

Conclusion p. 56

Discussion p. 57

Literature p. 59

Appendix p. 63

3
Introduction
Over the last decade the number of emerging countries in the global economy has risen.
Emerging countries are likely to play an important role in the global business and investment
industry; they will contribute to global growth. Therefore, the World Bank has submitted that
a shift in the current economic global power is not unreasonable and that emerging market
countries are likely to become key players in the global financial market (World Bank, 2011
a).
In 2001, O’Neill from Goldman Sachs Investment Bank introduced the acronym BRIC
which stands for Brazil, Russia, India, and China, and argued that these four countries were
capable to get a much larger force in the world economy over the next fifty years. In
December 2010, the BRIC was expanded to BRICS because China invited South Africa to
join the BRICs. Together these five countries are cooperating in trade, investment and
infrastructure development in order to achieve a change in the current economic global power.
However, the global economic crisis in 2008 has resulted in a loss of consumer confidence
and this has resulted in panic on the stock market. As a consequence, unsure feelings have
influenced future demand and financial stability in many companies: savings and investments
have been affected. As a result of changing thoughts, different statements and theories have
been revisited. An important revisited point is the change in the belief in the Efficient Market
Theory, which will be the focus of this paper (Jain, 2006; Lange, 2011).
Over the years, many studies have focused their investigation on the existence of
calendar effects, often interpreted as market anomalies, in mature markets in North America
and Europe. Yet, not much attention has been paid to the presence of these calendar-anomaly
effects in emerging markets. However, it is very valuable to examine the existence of calendar
effects in these economies, because the foreign exchange market plays a pervasive role in
emerging countries. In the 2007 study of Berument, Coskun, and Sahin an examination of
calendar anomalies in the Turkish foreign exchange markets is developed. They find that in
comparison with Wednesdays, Thursdays are associated with higher returns and Mondays
generally generate lower returns. In addition, in this paper we want to investigate whether
evidence can be found for both the day-of-the-week effect and the turn-of-the-month effect in
the BRICS foreign exchange markets in the period 2001-2012. Therefore, we would (partly)
use the methodology of Berument et al. (2007) as a leading line to determine whether
evidence is found for the existence of calendar anomalies in the BRICS foreign exchange
markets. The research question reads as follows:

4
 Does there exist evidence for the presence of calendar anomalies, specifically day-of-the-
week effects and turn-of-the-month effects, in the foreign exchange markets of the BRICS
countries against the US dollar and in the cross-currency exchange rates, during the period
2001-2012
The study of Berument et al. (2007) is leading in the BRICS examination, since their work
provides a revised guideline on how to measure calendar anomalies in foreign exchange
markets. Most studies that focus on the investigation of calendar anomalies use the standard
Ordinary Least Squares method. However, the OLS methodology does not properly account
for both autocorrelation in the errors and heteroscedasticity. The EGARCH methodology
overcomes these shortcomings and will therefore be able to give a more precise statement
about the existence of calendar anomalies.
Following the research question the main hypothesis for this investigation is:

Both the day-of-the-week effect and the turn-of-the-month effect are present in the BRICS
foreign exchange markets during the period 2001-2012.

Although, the Efficient Market Theory has been a major issue for many years, the recent 2008
global crisis has shown that the existence of an empirical basis is not so obvious. Therefore, it
is unlikely that the reaction of market prices to new information is instantaneous and
unbiased, so that market prices are not reflecting all available information concerning new
information and news spreads. Thus, it can be assumed that market prices are not indicating
accurate signals for resource allocation and that market inefficiencies do exist. Since market
anomalies may result in arbitrage opportunities, this would lead to deviations from the EMH.
As mentioned, the focus in this paper lies on emerging markets, which are going through a
huge economic transformation process. Since, emerging countries are now shifting to a more
global environment with modern systems, it becomes clear that there is no universal access to
high speed and advanced systems of pricing analyses. Therefore, this can be seen as evidence
of the absence of perfect market efficiency and this can result in the existence of arbitrage
opportunities for investors.
In order to come to a final answer of the main question, in part I we start with a
theoretical framework in which we discuss the basic concepts of calendar anomalies in
foreign exchange markets. In the first chapter both market efficiency and deviations from the
Efficient Market Theory are discussed. In the second chapter the focus lies on emerging
countries, and more specifically on the BRICS countries. The last chapter of the theoretical
framework concentrates on foreign exchange markets, with the focus on the BRICS foreign

5
exchange markets. Finally, in part II we discuss the empirical research, which treats whether
evidence for the existence of calendar anomalies in the BRICS foreign exchange markets is
found and we will end up with an optimal investment strategy on TOM effects.

6
 Part I Theoretical Framework
1. Market Efficiency
The Efficient Market Theory has been a major issue in the financial literature for the past
thirty years. In 1978, Jensen stated that there is no other proposition in economics that has
more solid empirical evidence supporting it than the Efficient Market Hypothesis (EMH).
However, after the 2008 global economic crisis it might seem odd to claim that markets are
efficient, because of the absence of a solid empirical basis (Guerrien & Gun, 2011).

1.1 Efficient Market Hypothesis

Fama (1969) was the first who defined the term efficient market. He made clear that the
allocation of ownership of the economy’s capital stock is the primary role of capital markets.
An ideal market will be a market in which firms can make production-investment decisions
and where investors can choose among securities under the assumption that the security prices
will fully reflect all available information. The accepted view, in line with the full reflection
of all available information, is that after the publication of new information, news spreads
very quickly and is incorporated into the prices of securities without delay. Thus, no old
information can be used to predict further prices. Therefore, it can be stated that the market is
efficient if the reaction of market prices to new information is instantaneous and unbiased. In
that case market prices are indicating accurate signals for resource allocation (Fama, 1969;
Malkiel, 2003).
As a consequence of the accepted view that information is quickly and efficiently
incorporated at any point in time, Roberts (1967), and Fama (1969) state that three forms of
market efficiency are commonly distinguished in the EMH literature. This distinguishing is
based on the level of available information. The first form, the weak form EMH, indicates that
current asset prices only reflect easily accessible pieces of information, namely past and
current asset prices, and volume information. Therefore, nobody should be able to outperform
the market. The second form, the semi-strong EMH, indicates that all publicly available
information is already incorporated into current asset prices. This implies that the financial
statements of firms are not useful in predicting future price movements. The third form, the
strong EMH, states that all public and private information is included in current asset prices.
Thus, even the company’s management is not able to take the advantages to profit from inside
information. Although the mentioned forms of EMH differ in their information set, all three
indicate that there is an absence of arbitrage opportunities (Fama, 1969; Timmerman &
Granger, 2004).

7
 An extension of the EMH is the idea of the random walk theory. The random walk
theory states that if information flows are without hindrance, and if information is
immediately reflected in stock prices, then tomorrow’s price change will be independent of
today’s price change. Thus, tomorrow’s price change will only reflect tomorrow’s news. As a
consequence of the unpredictability of news, price changes must be random and they only
reflect all known information. Just like the Efficient Market Theory, the random walk
hypothesis played an important role in the financial literature for decades (Fama, 1965;
Malkiel, 2003). However, nowadays the intellectual dominance of the EMH had become less
universal. Numerous studies were conducted to prove that market inefficiencies do exist and
that anomalies appear in various forms. Therefore, many economists turn their vision and
believe that stock prices are at least partially predictable (Agathee, 2008).

1.2 Anomalies: calendar effects

The examination of calendar anomalies or seasonality in stock returns is, just like the Efficient
Market Theory, a major issue in the finance field. The investigation of anomalies in stock
returns is interesting, because patterns make it possible to draw conclusions regarding the
market efficiency theory. Since the existence of calendar patterns would imply return
predictability, this would represent evidence against the weak form EMH. However, empirical
research of calendar anomalies in other markets than the stock market has been limited.
Foreign currency markets for example, are as important as stock markets for portfolio
investment, but anomalies still received little attention in studies of exchange rate behavior.
Even when studies base their research on foreign exchange markets, another drawback
emerges: anomalies are often only tested in advanced countries. The documentation of
calendar anomalies in foreign exchange markets in emerging countries is almost completely
absent (Aydoğan & Booth, 2003; Agathee, 2008).
Financial market anomalies are patterns, both cross-sectional and time series patterns,
which are not predicted by textbook theories. Anomalies should not occur and they should not
persist, because the presence of these anomalies suggests arbitrage opportunities, which is not
in line with an efficient market. Thus, stated differently, anomalies can be seen as deviations
from the Efficient Market Hypothesis. The exact explanation behind this phenomenon is not
known, but various hypotheses have been addressed to explain this phenomenon. Behavioral
finance literature has dealt largely with this issue of anomalies. The behavioral view assumes
that anomalies in financial markets represent naïve and irrational investor behavior. Naïve
investors overreact to information and price changes, and these investors will incorrectly

8
extrapolate past growth too far in the future. In emerging markets, anomalies may remain
present for a long time period, due to a lack in steady information flows (Cabello & Ortiz
2005; Frankfurter & McGoun, 2001).
To be more specific, calendar effects are defined as cyclical anomalies in the financial
market, whereby the cycle is based on the calendar. Calendar effects show different behavior
in financial markets on different days of the week, in different months of the year and during
specific time periods in the year, e.g. before holidays. So, during these different time periods,
the common thought is that returns can be better or worse. Therefore, using your money at a
particular time at a specific place, helps or harms returns (Chakrabarti & Sen, 2011).
Although anomalies appear in various forms, the day-of-the-week effect, the January effect,
the-turn-of-the-month effect, and the holiday effect are seen as the most popular types. In this
study the focus will rely on both the day-of-the-week (DOW) effect and the turn-of-the-month
(TOM) effect in foreign exchange markets in emerging countries. Therefore, a description of
these two anomaly types is given in the next section.

1.2.1 Day-of-the-week effect

The DOW effect implies that the generation of returns in financial markets is not independent
of the day of the week. The first study of this phenomenon dates back to 1930; in this study
Kelly revealed the existence of a Monday effect on the US markets where the return turned
out to be negative. From that moment on, various studies on DOW effects in stock markets of
advanced countries have been generated (Sutheebanjard & Premchaiswadi, 2010). However,
since this work focuses on calendar anomalies in the foreign exchange market of the BRICS,
from now on the focus will rely on the description and empirical results of foreign exchange
market studies. Therefore, it is useful to have a more specific description of the DOW effect
in foreign exchange markets. The DOW effect in foreign exchange markets implies that you
as investor put your money in countries where the exchange rate rises in relation with the
home country, so that you take the changes on the currency falling. On the other hand when
rates are declining in countries relative to the home country, you keep your money in the
home country (Froot & Thaler, 1990).
As stated by Ke, Chiang and Liao (2007), McFarland, Pettit, and Sung were the first
who investigated the DOW effect in the foreign exchange market, in 1982. Their study shows
that Mondays and Wednesdays offer higher returns than Thursdays and Fridays. This finding
is later confirmed by various other studies, like the 1987 study of So, and the 1995 study of
Cornett, Schwartz, and Szakmary. However, these studies focus on the DOW effect in foreign

9
exchange markets in advanced countries, instead of focusing on emerging countries. The
study of Aydoğan and Booth (2003) focuses both on the DOW effect and the TOM effect in
the Turkish foreign exchange market, which is an emerging country according to the official
lists of the S&P 500 (S&P 500, 2011). This 2003 study reveals that returns are generally
higher on Tuesdays and Wednesdays in the Turkish foreign exchange markets and lower on
Fridays. Berument et al. (2007) also focus their study on the Turkish foreign exchange
market. They show that in comparison with Wednesdays, Thursdays are associated with
higher returns and Mondays generally are confronted with lower returns. In addition, Ke et al.
(2007) observed the DOW effect in the Taiwan foreign exchange market. Nowadays, Taiwan
can also be seen as an emerging country, according to the official lists of the S&P 500 (S&P
500, 2011). The study observes higher returns during the first three days of the week,
Monday, Tuesday, and Wednesday.
However, the study of Yamori and Mourdoukoutas (2003) has found that DOW
effects in the Tokyo foreign exchange market disappeared in the 1990s, while they existed
before. Also, the research of Yamori and Kurihara (2004) shows that it is not conclusive that
anomalies are present in all foreign exchange markets.

1.2.2 Turn-of-the-month effect

As stated by Hensel and Ziemba (1996), the TOM effect indicates that during the turn of the
month, stocks can experience substantial price changes. To be more specific, the turn of the
month can be defined as the last trading day of a certain month and the first four trading days
of the coming month. So, during these five trading days higher returns can be realized in
relation with the rest of the month. As mentioned by Booth, Kallunki and Martikanen (2001),
Fosback was one of the first who came up with this result for the US stock market in 1976.
This finding is later confirmed by various other studies, like the 1987 study of Ariel. Booth et
al. (2001) mention that the study of Ogden in 1990 finds evidence for the existence of the
TOM effect in the US market, since an accumulation of cash by large institutional investors at
the end of the month can be seen. They also state that the 1991 work of Ziemba suggests that
the existence of the TOM effect can be explained by the rise in buying pressure of small
institutional investors.
Subsequently, evidence for the existence of the TOM effect was also documented in
other countries, like studies of Barone (Italy), Ziemba (Japan), and Cadsby and Rather
(Australia, Canada, Germany, and Switzerland) suggest (Booth et al., 2001). However, these
studies all focus on the stock markets in advanced countries. As stated above the

10
documentation of calendar anomalies in foreign exchange markets in emerging countries is
very limited. As mentioned, the study of Aydoğan and Booth (2003) also focuses on the TOM
effect in the Turkish foreign exchange market. In their study they find that the exchange rate
changes tend to be lower in the week before the TOM, and returns are higher for the first five
days of the month.

11
 2. Emerging Markets
Nowadays, emerging market countries constitute approximately 80% of the world population,
and together they represent 20% of the world economy. Although the definition of emerging
markets may vary, the definition for an emerging market country provided by the World Bank
is most common. According to the World Bank (2011, a) emerging markets are economies
with relatively high levels of economic potential and international engagement. More
specifically, the World Bank defines an emerging market economy as a country that is taking
steps toward developing a market-oriented economy to integrate into the world economy. In
other words, emerging countries are in the process of moving from a closed economy to an
open market economy, and they are building accountability into the system.
Usually, emerging market economies are countries that have a low to middle per
capita income. Since the income per capita determines whether a country can be seen as an
emerging market, both large and small countries, which have at least a minimum population
of 1 million, can fall within the definition. Because the range of potential emerging market
countries is worldwide, only countries who have a per capita income of less than a certain
amount are eligible for the term emerging market economy. However, this amount of income
or equivalently the ceiling of income differs every year. In 2010, a per capita income of
$12,195 is the ceiling of Upper Middle Income economies such as determined by World Bank
World Development Indicators. A main point of emerging markets is that they will reform
their exchange rate system, because a stable local currency ensures confidence in the
economy. At the same time, a stable local currency leads to a reduction in the desire for local
investors to send their capital abroad, as a consequence of the flight to safety principle.
Therefore, the domestic economy can be strengthened and this creates a more attractive
investment environment for foreign investors (World Bank, 2011 a, b).

2.1 BRICS countries

Over the last decade it became clear that the world scene has changed significantly and new,
major players have taken the stage. Nowadays, still no end has come to this transformation
process, and one of the most visible outcomes is the rising number of emerging countries in
the global economy. In 2011, the World Bank argued that emerging countries will cause a
shift in the current economic global power. Successful economies will stimulate growth in
lower income countries through cross-border commercial and financial transactions. Since
these countries pursue growth opportunities abroad and because of improved policies at home,
emerging markets will play an increasingly prominent role in the global business and cross-

12
border investment; emerging countries will contribute to global growth, alongside the current
advanced countries. So, in the nearby future it is possible that the international monetary
system will no longer be dominated by a single currency. Emerging market countries, whose
sovereign wealth funds and additional pools of capital are becoming more important sources
of international investments, are likely to become key players in financial markets (World
Bank, 2011 a).
In 2001, O’Neill from Goldman Sachs Investment Bank introduced the acronym BRIC,
which represents Brazil, Russia, India, and China. O’Neill stated that if things go right, these
upcoming four countries would be able to obtain a much larger force in the world economy
over the next fifty years, see appendix A. However, now we know that things did not go right
in the last decade, and that we are confronted with a worldwide loss of confidence as a
consequence of the global crisis. While debt-ridden countries such as the United States are
facing scarce growth, emerging countries are severely affected, and they are expected to
produce more than half of the global output by 2013. But, as a consequence of the global
crisis it will become harder to achieve the statement of Goldman Sachs to receive the
predicted economic force over the coming fifty years (O’Neill, 2001; Jain, 2006).
Since the introduction of the acronym BRIC, Brazil, Russia, India, and China are together
seeking out opportunities for cooperation in trade, investment, and infrastructure
development. In December 2010, China invited South Africa to join the BRICs and from then
on BRIC was extended to BRICS. Although, emerging countries share characteristics, like the
modest impact of the global crisis on their economic growth perspectives, the BRICS
countries are different from other promising emerging economies in terms of their
demographic and economic potential to rank among the largest and most influential
economies in the world. Data of the World dataBank1 shows that together the five countries
cover more than 40% of the world population (42%) and they account for 30% of global GDP
in 2010, see appendix B. These population and demographic factors directly affect the
potential size of the economy and indicate whether a country is able to experience global
economic growth and development (Jain, 2006; Kharas, 2010).

2.2 BRICS characteristics

As businesses become more global, economies around the world are becoming more
integrated in terms of trade and financial flows. Therefore, the independencies among world

1
http://databank.worldbank.org/

13
financial markets have increased. In the last decade, a growing trend of inward and outward
foreign direct investment between the BRICS countries and the developed economies has
been observed. As mentioned above, as a consequence of the global financial crisis developed
countries are confronted with economic contraction. In contrast, data of the World dataBank2
shows that emerging countries are facing slow progress again. It can be seen that both China
and India are gradually growing, although the growth rate is only half of the rate before the
global crisis. However, as published on the International Monetary Fund website3 China and
India are dealing with faster economic growth and demographics than Brazil, Russia, and
South Africa. The faster economic growth and demographics in these two countries are
expected to give rise to a large middle class. The consumption of this large middle class will
drive the BRICS economic development and expansion.

2.2.1 Similarities and differences in BRICS characteristics

Brazil, Russia, India, China, and South Africa are clustered in a unit because the five
countries have several common characteristics that bring them together. The cohesive factor
of the BRICS countries is that they all agree that the United States should not be so dominant
in the world economy. All five countries are promoting change in the global environment, and
this forms their main common interest. However, the BRICS countries are obviously not
identical. It is important to note the similarities and differences in the countries’ history and in
the structure of the economy, because this can explain why there is division in the
development of the five countries (Aroul & Swanson, 2011).
What can be seen is that all five countries are federal states; however the extent to which
their institutional democracies are developed differs. Brazil (presidential) and India
(parliamentary) are well developed institutional democracies. China is a Marxist people’s
republic, Russia is a declared democracy moving to authoritarianism, and South Africa has a
constitutional democracy. In addition a common feature of the BRICS is that the innovation
systems of all five countries were subjected to radical transformation processes during the last
ten years. Although the radical transformation of the innovation systems is a shared issue, all
transformations have followed their own path and this leads to a division in the development
of the five countries. Besides this huge, common change in the innovation systems, the
BRICS countries are exposed to more shared characteristics. All five BRICS countries have
modern industrial sectors, which have access to the global capitalist economy. In addition, to

2
http://databank.worldbank.org/
3
http://www.imf.org/

14
accept global capitalism all five countries have changed their political systems. And by the
strong cooperation of the BRICS countries, all five have the potential to become economically
powerful (Aroul & Swanson, 2011; Standard Bank of South Africa, 2012).
Although all BRICS countries have similarities, a major difference between the countries
is that they have their own cultural and geographical characteristics. In addition, the countries
are facing dissimilar internal politics and economics, and they are comprised of very different
histories. When looking at the structures of the five economies, it becomes clear that Brazil is
specializing in agriculture; Russia is specializing in commodities, India in services, China in
manufacturing, and South Africa in mining and agriculture. What can be seen next, while
examining the different histories of the countries, is that both China and Russia have gone
through a somewhat similar historical process. China has faced a planned economy for many
years, in which the government had control over the citizen’s personal lives. Just like China,
Russia was also confronted with a planned economy and it was familiar as well with
collectivization for a long time period. In addition India, Brazil, and South Africa also have a
similar type of background. These three have a shared history of colonization, which
influences the structure and the working of the national innovation systems. All three have
experienced how colonial power resulted in a slowdown of production and the use of
knowledge in the economy. This had led to the awareness that science and technology are the
preconditions for independence (Aroul & Swanson, 2011; Cameron, 2011; Standard Bank of
South Africa, 2012).
Another common feature is that each country in the BRICS is having its own unique
threatening challenges, which influences the degree of development and could result in a
slowdown of the economic progress. The unique threatening challenges are characteristic for
each country, and therefore every country is confronted with a different economic
development. What can be seen is that Brazil is constrained by the inability to capitalize and
grow rapidly, although they have high commodity prices. Russia has corruption problems,
India is faced with a poor physical infrastructure, China has to deal with pollution problems,
and South Africa is still dealing with huge racial problems as a consequence of the history of
colonialism. Thus, it becomes clear that although all BRICS countries have similarities and
differences with each other, the individual characteristics of the countries should not be
forgotten (Aroul & Swanson, 2011; Cameron, 2011).

15
 3. The foreign exchange market
The foreign exchange market can be defined as the financial market in which given amounts
of currencies are exchanged for another amount of currency. Or stated differently, it is a
market in which currencies are bought and sold, and where borrowers are allowed to meet
their financing needs in the currency which is most conducive to their specific requirements.
The foreign exchange market is often seen as a highly liquid and efficient market, as a
consequence of the large trading activities. The main objective of the market is to facilitate
international trade between participants. Because the prices of foreign assets, goods, and
production factors depend on the changes in exchange rates, and they thus have a huge impact
on the real economy, it is important to have an efficient foreign exchange market. However,
as more arguments are cited against the Efficient Market Theory, mostly arising from studies
in the stock market, it is also important to question whether foreign exchange markets are
providing evidence against the Efficient Market Theory (Froot & Thaler, 1990; Frankfurter &
McGoun, 2001).

3.1 Global foreign exchange market turnover

According to the Bank for International Settlements (2010), the Triennial Central Bank
Survey of Foreign Exchange and Derivatives Market Activity is providing the most
comprehensive and internationally consistent information, concerning the size and the
structure of global foreign exchange markets and over-the-counter derivatives markets. Every
three years the Bank for International Settlements is coordinating this global central bank
survey. The survey aims to help monitory authorities and market participants, by increasing
market transparency, to better monitor activity patterns and exposures in the global financial
system.
In December 2010, the Triennial Central Bank Survey announced that the global
average daily turnover was $4.0 trillion in April 2010, compared with $3.3 trillion in April
2007. Although it is obvious that the average daily turnover in the global foreign exchange
market is enormous, this 20% growth rate was much smaller than the growth rate seen
between 2004 and 2007. During 2004-2007, the foreign exchange trading grew by a record of
72%, as a consequence of low volatility in the foreign exchange markets and the high growth
rate of hedge funds. But during the global financial crisis of 2007-2009, the foreign exchange
rate volatility grew dramatically and this resulted in lower foreign exchange trading growth.
Nevertheless, as a consequence of foreign exchange risk management, which became a focus
point for financial institutions, corporations, and other market stakeholders, still a 20%

16
increase in daily turnover is seen in 2010. In addition the Triennial Central Bank Survey
stated that the foreign exchange market became more global, with cross-border transactions
representing 65% of trading activity in April 2010 (Bank for International Settlements, 2010).
The attention for emerging markets from investors and financial scholars has risen
during the last decade. On the one hand investors are attracted because of the high returns
offered by emerging markets. On the other side as a consequence of high volatility and the
macroeconomic crisis, researchers are determining the characteristics of emerging markets,
the patterns of segmentation, co movements, and contagion and integration with other
markets. This improves the degree by which investment strategies are determined, and it
improves the efficiency of national growth (Cabello & Ortiz, 2005). In appendix C, the
percentage shares of average daily foreign exchange market turnover are displayed. What can
be seen is that the percentage share of US Dollar, Euro, Japanese Yen, and Pound sterling is
declining, in relation to emerging countries. In 2001, these four currencies accounted for
164.3%; the total percentage share of individual currencies totals 200% instead of 100%, this
percentage is reached because two currencies are involved in each transaction. However, in
2010 the four mentioned currencies together had a 155.9% share (Bank for International
Settlements, 2010).

3.2 BRICS foreign exchange markets

As shown by a survey of McCauley and Scatigna (2011) from the Bank for International
Settlements, evidence for a rapid growth in the turnover in emerging market currencies is
found. What can be seen is that several up-and-coming currencies are traded outside their
home market by a greater extent than in foresight was estimated by market participants. When
income per capita rises, both evidence for financialization and internationalization is found.
This means respectively that a currency is trading in greater multiples of the home economy’s
underlying international trade, and that the currency is trading to a greater extent outside the
home market.
The research of McCauley and Scatigna (2011) is showing that when economies
develop, trading of the currencies of these economies grows faster than the current account
transactions, like the flows of goods and services. However, some currencies do stand out,
based on the relationship between turnover and income. This can be caused by the amount of
foreign investment in the equity market in these countries. Although, China and India have a
quite close turnover, respectively $34 billion and $38 billion, they differ in the extent of
foreign investments. The Chinese economy is larger and more open than the Indian economy;

17
however the turnover amount in China is lower than in India. This indicates that the Chinese
Yuan trades less than expected based on Chinese trade and income, while the Indian Rupee
trades more than was expected in foresight. But there is a restriction of most foreign
investment to Chinese shares listed offshore, while India does not have this restriction.
Therefore, the extent of foreign investment may partly explain the difference in turnover
amounts between China and India.
In addition, currencies also show dispersion in the geography of trading, see appendix
D. Some currencies are trading largely in the home currency market, both indicating strictly
domestic trading (onshore trading) and trading between a resident and a non-resident
(onshore-offshore trading), while other currencies trade for the most part outside the home
market, trading between two non-residents (strictly offshore trading). What can be seen for
the BRICS countries is that trading in the Brazilian Real mostly occurs in futures, and futures
are traded onshore between residents. In India trade in the Indian Rupee occurs for the biggest
part in the home market (onshore, futures, and onshore-offshore). Also trading in the Russian
Rouble mostly occurs in the home market. However, it is seen that both China and South
Africa mostly trade outside the home market (strictly offshore trading). So although the
BRICS countries have common factors, there are main characteristics that are different. It is
important to understand the existence of differences, because this might influence the
development path of the BRICS countries (McCauley & Scatigna, 2011).

3.2.1 The BRICS foreign exchange markets’ structure

To understand the differences in the geography of trading in the foreign exchange market
among the BRICS countries, it is useful to give a short overview of the foreign exchange
market structures of the five countries. What can be seen is that recently, the Brazilian foreign
exchange market had to deal with many transformations in terms of deregulation and
simplification. Nowadays, the foreign exchange transactions carried out in the Brazilian
foreign exchange market must be registered under the Central Bank of Brazil4. The accounts
that are denominated in the Brazilian currency are open for both residents and non-residents
of Brazil. However before 2005, only transfers and transactions which were specified by the
Brazilian Central Bank were allowed. This changed after the new and improved foreign
exchange regulations policy of the country (Finance Maps of the World, 2012).

4
http://www.bcb.gov.br/?english/

18
 The Russian foreign exchange market reflects the general development of the Russian
economy together with the increased participation of Russia in the world economy. Over the
years, the Russian foreign exchange market has changed from a multiple exchange rate, to a
managed floating, and thereafter to a soft peg. In 1991, it was the Central Bank of Russia that
created the first currency exchange in Russia, the Moscow Interbank Currency Exchange
(MICEX). Nowadays, the Russian foreign exchange market is controlled by the Central Bank
of Russia5. The Central Bank of Russia is issuing special licenses to commercial banks, and
by issuing these licenses they control the internal foreign exchange turnover (Finance Maps of
the World, 2012).
As stated on the official website of the Central Bank of India, the Indian foreign
exchange market is growing very rapidly6. Nowadays the entire foreign exchange market is
regulated by the Foreign Exchange Management Act, 1999 (FEMA). Before the introduction
of FEMA, there was the common thought that there was a need for conservation of foreign
currency. This thought fell when India was confronted with more economical and industrial
development and resulted in the establishment of FEMA. As a consequence of the
development of technologies, which overcomes the former lack of communication facilities,
all the foreign exchange markets of India (Mumbai, Kolkata, New Delhi, Chennai, Bangalore,
Pondicherry, and Cochin) are working collectively (Finance Maps of the World, 2012). Next,
the Chinese foreign exchange market represents an important segment of the national
economy of China. Nowadays, their foreign exchange market constitutes the largest business
component of the global financial market7. What can be seen is that the currency exchange
rates in China keep on fluctuating by the changes in the international trade and commerce
segment. This arises because the foreign exchange rates in China depend on the exchange rate
of Yuan with respect to other foreign currencies. The Chinese Central Bank determines the
exchange rates of the national currency (Finance Maps of the World, 2012).
Finally, we see that the South African foreign exchange market is largely influenced
through the globalization of world financial markets. Integration of the financial markets had
a major impact on the South African exchange rate. What can be seen is that the exchange
rate became more exposed and was subjected to international developments. Nowadays, the
foreign exchange market is the single biggest market of all South African financial markets 8.

5
http://www.cbr.ru/eng/
6
https://www.centralbankofindia.co.in/
7
http://www.pbc.gov.cn/
8
http://www.resbank.co.za/

19
Since the South African openness, this market is extremely important. During the last decade
the turnover in the currency in foreign exchange in South Africa has increased significantly
and this increase in turnover is expected to continue for the coming years (Finance Maps of
the World, 2012).

3.3 Foreign exchange rate fluctuations

The foreign exchange rate refers to the ratio at which the unit of a currency in one country can
be exchanged for the unit of a currency of another country. Thus, the foreign exchange rate is
the price of the currency of one country expressed in terms of the currency of another country.
Therefore an exchange rate is a two-way interpretation whereby you can use a direct
quotation or an indirect quotation. The direct quotation indicates that you use the country’s
home currency as the unit currency, stated as home currency/foreign currency. However, the
indirect quotation is working in the opposite direction, stated as foreign currency/home
currency. Because foreign exchange transactions involve different currencies, the exchange
rate is determined by both demand and supply of the currencies involved in the exchange
process. The foreign exchange rate transactions are affected by different factors, and these
factors are the reason for the existence of exchange rate fluctuations. So this can lead to an
increase in the exchange rate number when the unit currency is depreciating and thus is
becoming less valuable. Vice versa it can lead to a decrease in the exchange rate number
when the unit currency is strengthening (Tille, 2008; Bouakez & Normandin, 2010; Standard
Bank of South Africa, 2012).
A main factor, which is causing fluctuations in the exchange rate, is in the first place
the interest rate. When investors elsewhere can earn a higher return, they move their money to
those places. The higher the interest rate in a country, the greater the amount for that
particular currency and the more valuable the currency becomes, since demand will become
relatively higher than supply. Second, political developments are influencing exchange rate
fluctuations. If a country’s level of inflation is relatively high compared to other countries, it
is possible that the country’s currency will lose value. In addition, when a country is
confronted with an expectation of a decline in the level of output, the currency may also lose
value, just like unrest in a country caused by political uncertainty. Next, government policy is
affecting the exchange rate. Central Bank intervention, in line with government policy can
influence the supply of the currency, to smooth fluctuations in currencies. In addition they can
also influence the exchange rate. By speculation, investors can profit from fluctuations
through buying, holding, and selling currencies. As prices rise above the true value as a

20
consequence of speculative purchasing, this can cause currency fluctuations. Also speculative
selling, which causes prices to fall below the true value, can cause currency fluctuations. At
last, market sentiment is influencing exchange rate fluctuations. The perception of both
individuals and the industry can cause fluctuations in the foreign exchange rate (Bouakez &
Normandin, 2010; Standard Bank of South Africa, 2012).

3.3.1 Purchasing Power Parity

As stated by the Organization for Economic Cooperation and Development (2012), the
Purchasing Power Parity (PPP) refers to the currency conversion rate which is necessary to
convert to a common currency, and which is used to equalize the purchasing power of
different currencies. In other words, the PPP can be seen as the level of the nominal exchange
rate, which is the domestic price of a foreign currency, to make sure that a similar purchasing
power of a unit of currency in both the foreign and domestic economy is realized. So, the
level of the nominal exchange rate is used to ensure that the purchasing power of a unit of
currency is exactly the same in the foreign economy as well as in the domestic economy, after
the conversion into the foreign currency with the nominal exchange rate (Taylor, 2003). As
stated by Taylor (2009), alternatively the PPP can be expressed by using the concept of the
real exchange rate. The real exchange rate multiplies the nominal exchange rate with the ratio
of national price levels, and the latter is the domestic price level divided by the foreign price
level.
Since the introduction of the term PPP by Cassel in 1918, many economists have
argued that the PPP continuously holds. However, nowadays this view has changed and this
has resulted in the believe of the existence of a long-run equilibrium condition. This indicates
that the real exchange rate should be stationary and mean-reverting. Therefore, it can be
assumed that under the long-run PPP the long-run equilibrium real exchange rate is an
unchangeable constant, which equals one when using the absolute PPP. If there indeed exists
a long-run equilibrium, this would indicate that the short-run PPP is violated if the real
exchange rate does not equal the long-run equilibrium value (Abuaf & Jorion, 1990; Taylor,
2009). So if PPP holds, then it is possible to express the domestic price level in foreign
currency terms so that it equals a level equal to the domestic price level. When
denotes the nominal exchange rate, then the expression of the domestic price level in foreign
currency terms will end up as equation 1. Equation 1 represents the absolute PPP, which is
based on the principle that an amount of goods in country A costs the same as the amounts of
goods in country B, when taking into account the exchange rate (Taylor, 2003).

21
 (1)

In addition the relative PPP, which defines the differences in the inflation rates between
countries, holds when changes in the PPP between two countries are equalized, see equation 2
(Taylor, 2003).

(2)

Equation 2 shows the first difference operator of the price level of the domestic currency
, the foreign price level , and the domestic price of the
foreign currency .

Thus, the measurements of the PPP make it possible to express the domestic price
level in foreign currency terms, so that both the domestic price level and the foreign price
level are equalized. Or equivalently, that the purchasing power of a unit of currency is exactly
the same in the foreign economy as well as in the domestic economy, after the conversion into
the foreign currency with the nominal exchange rate as mentioned above.

3.3.2 (Un)covered interest rate parity

The interest rate parity (IRP) condition is, just like the Efficient Market Theory, a major
concept in international finance. Since Keynes formalized the theory of IRP in the twentieth
century (1923), IRP has played a role as the benchmark for perfect capital mobility between
markets. With the worldwide globalization IRP has become even more important, as a
consequence of the increased mobility in financial markets. However, during the global
financial crisis substantial deviations from IRP among the world’s major convertible
currencies were observed (Levich, 2011).
A parity relation, which involves different currencies, is likely to hold if the currencies
have equal prices. In other words, when IRP holds the ratio of yields between the currencies is
setting the forward rate equal to the spot rate. The cash flows of forwards contracts can be
taken over by a spot contract in combination with both borrowing and lending in the
currencies. In equation 3 the parity relation is given.

(3)

As stated in equation 3, the parity relation involves two currencies, e.g. the US Dollar
(currency 1) and the Euro (currency 2). Thus, by using the US Dollar and the Euro, the one-
period interest rates in the currencies are given by and . A forward contract is

22
binding the buyer to deliver units of US Dollar in one period (with as the one-period
forward rates in $/€) in exchange for €1. In contrast, an agent can borrow units of US

Dollar today at a cost of . Next, the agent will exchange the US Dollars for Euros in the
spot market (with as the spot rates) and he will invest the Euros at the rate for one-
period. This alternative would result in the same proceeds as the yields provided by using a
forward contract. Since this replication transaction involves covering foreign currency
exposures, IRP is also known as the covered interest rate parity (CIRP) condition (Levich,
2011). It becomes clear that the CIRP condition assumes that positive returns cannot be
earned by simply borrowing and investing money in different currencies. So, borrowing a
home currency, and investing this amount in a foreign currency on a covered basis does not
provide additional yields (Jones, 2009).
As stated by Isard (2006) the uncovered interest rate parity (UIRP) condition is an
extension of the CIRP condition, since it adds an element of dynamics to the CIRP condition.
In equation 4 the UIRP is given.

(4)

As stated in equation 4, the UIRP equation involves the time-t continuously compounded
domestic n-period interest rate ; the time-t continuously compounded foreign n-period
interest rate , the logarithm of the spot exchange rate , and the constant risk
premium . So, the UIRP condition is hypothesizing a relationship between observed values
of variables at time t and the expected value of the spot exchange rate that is likely to prevail
at time t+1. The UIRP assumes that high yield currencies will depreciate in the (nearby)
future. In addition, the UIRP predicts that an increase in the real interest rate leads to an
appreciation of the currency, while holding everything else equal (Bekaert, Wei & Xing,
2007).

3.3.3 BRICS-Dollar exchange rates

Since the focus in this work relies on calendar effects in the BRICS foreign exchange market,
it is useful to be more specific about the BRICS foreign exchange rate. The direct price
quotation is used for the foreign exchange transaction, since this method is most common
(Standard Bank of South Africa, 2012). Therefore, the currencies of the BRICS countries are
used as the home currency. This indicates that the used home currencies are the Brazilian
Real, the Russian Rouble, the Indian Rupee, the Chinese Yuan, and the South African Rand.

23
In addition, the US Dollar is used for the foreign currency, since the US Dollar is trading
strictly offshore, see appendix D. By using the direct price quotation, an expression of 1
foreign currency unit is obtained in terms of a certain amount of home currency units. This
indicates that 1 US $ is expressed in terms of # Real, Rouble, Rupee, Yuan, and Rand.
Since the BRICS countries have their own national currencies with different turnover
levels, each foreign exchange rate is different. As mentioned above, the foreign exchange rate
changes if the value of either of the involved currencies changes. In appendix E an overview
is given of the average foreign exchange rate per BRICS currency with the US Dollar per year
during the period 2002-2012. What can be seen is that no clear pattern in the foreign exchange
rates can be observed. The absence of a clear pattern, or equally, the existence of exchange
rate fluctuations is caused by the continuous influence of the different factors described
above.

3.3.4 Cross-currency exchange rates of the BRICS

Several emerging countries are contributing to a change in the global economy, since their
markets play an important part in business and investments. Therefore their currencies are
also becoming more important, and they might challenge the domination of the US Dollar in
global business. Since the BRICS countries are seen as the most important upcoming
countries it is useful to place their currencies in the current position of the US Dollar. As a
consequence of their growing importance in the world economy and their transformation
processes towards more open economies, it can be assumed that their currencies will be traded
in higher frequencies offshore. So, this indicates that by using the direct price quotation, each
of the BRICS currencies is separately used as the foreign currency, and in addition the
remaining BRICS currencies plus the US Dollar are used as the home currencies. In appendix
F an overview of the average cross-currency exchange rates per year during the period 2002-
2012 is given. Just like the absence of a clear pattern in BRICS currencies/US Dollar was
seen, also in the cross-currency exchange rates an obvious pattern is not observed.

24
 Part II Empirical study

1. Empirical research

The empirical study part of this paper can be divided into subparts. First, we focus on the
research methodology, in which we give the methodology of the establishment of the OLS
and EGARCH (1,1) models. Second, we give a detailed description of the data, with the focus
on summary statistics, stationarity, and the introduction of the ARCH effects test. Third, we
give an overview of the empirical results, in which we handle a separation in the
representation of the OLS regression models outcomes and the EGARCH regression models
outcomes. Next, we give an overview of both regression models outcomes and an
interpretation of the outcomes. In addition, we develop an optimal investment strategy for
international investors in foreign exchange markets, followed by an investment advice.
Finally, we come up with concluding remarks and discussion points.

1.1 Research methodology

To begin the examination, first the formula for the daily depreciation rate of the BRICS
countries against the US Dollar must be defined. The daily depreciation rate is calculated as
the growth of the BRICS currencies value of the US Dollar, see equation 1.

(1)

In formula 1, the home currency depicts the currencies of the BRICS countries, respectively
the Brazilian Real, the Russian Rouble, the Indian Rupee, the Chinese Yuan, or the South
African Rand. The variables used in this formula to determine the daily depreciation rate of
the home currency of the BRICS countries ( ) are the BRICS currency value of the US
Dollar ( ), and the lagged BRICS currency value of the US Dollar, with lag i at time t .

In addition, the formula for the daily depreciation rate of the cross currencies is also displayed
as formula 1. However, in this scenario each of the BRICS currencies is separately used as the
foreign currency, and the remaining BRICS currencies plus the US Dollar are used as the
home currencies ( ). So, in this case the variables used are the BRICS currency or US Dollar
value of the remaining BRICS currency ( ), and the lagged BRICS currency or US Dollar
value of the remaining BRICS currency, with lag i at time t . For analyses of the foreign
exchange markets, the logarithm of the price ratios is used. A logarithm is used because prices
themselves reflect a ratio of the market's assessment of the value of one currency relative to
another.

25
 In order to answer the research question, first the OLS regression method is used. In
addition, when evidence is found for the existence of ARCH effects also the EGARCH (1,1)
regression method will be used. The generalized autoregressive conditional heteroscedastic
(GARCH) model is the extension of the ARCH model, which focuses on variance
heteroscedasticity and was first mentioned by Engle. The GARCH model predicts the
variance in time t, by using the weighted average long-term historical variance, the predicted
variance for the period and the previous day squared residual. The EGARCH model is a
variation of the GARCH model, and has the advantage that it models the logarithm of the
conditional variance. So even if parameters are negative they will be incorporated in the
model as positive. Since both the OLS regression and EGARCH regression require different
equations, it is important to define the various equations for the DOW and TOM effect.

1.1.1 OLS methodology

First, we start with a description of the OLS method for both the DOW effect and the TOM
effect. In equation 2, the formula for the DOW effect is displayed.

(2)

The variables used in formula 2 to determine the daily depreciation rate of the home currency
( are the dummy variable for Monday ( ), the dummy variable for Tuesday
( , the dummy variable for Wednesday ( , the dummy
variable for Thursday ( , the dummy variable for Friday ( , and
the first order lag of the depreciation rate, ( In each case, the dummy variable gives 1 if it
is the mentioned day of the week, and 0 otherwise. To overcome the dummy-variable trap, the
constant term is not included. A regression model with five dummy variables without a
constant indicates that the estimated coefficients can be seen as the average value of the
dependent variable during each day of the week. Since time series mostly deal with
autocorrelation in the residuals, the first order lag of the depreciation rate (Rt-1) is included in
the model. In addition, the Newey-West procedure is applied. The Heteroscedasticity and
Autocorrelation Consistent (HAC) standard errors provided by the Newey-West
methodology, correct for both heteroscedasticity and autocorrelation that might be present in
the data. To indicate if there is evidence for the DOW effect, the Wald test is used. The null
hypothesis of the Wald test tests whether all coefficients of DOW dummies are equal to each
other: D1Monday = D2Tuesday = D3Wednesday = D4Thursday = D5Friday. When evidence is found

26
for the existence of the DOW effect, we will perform an additional regression namely the
pooled regression analysis. Pooled regression analyses combine time series for cross-sessions,
whereby the pooled data is characterized by repeated observations on fixed units. This makes
it possible to end up with more informative outcomes; and subsequently more variability, less
collinearity, and more degrees of freedom are resulting in more efficient estimates. (Podestà,
2002; Brüderl, 2005).
Equation 3 illustrates the formula for the TOM effect.

(3)

The variables used in formula 3 to determine the daily depreciation rate of the home currency
( are the dummy variable for the TOM effect which involves the last trading day of the
month and the first four trading days of the following month ( , the dummy
variable for the remaining days of the month or equivalently the rest-of-the-month (ROM)
dummy , and the first order lag of the depreciation rate . The dummy
variables give 1 if it is one of the mentioned trading days of the month, and 0 otherwise.
Again, the constant term is not included to overcome the dummy-variable trap. And, just as is
the case in equation 2, the first order lag of the depreciation rate is included to eliminate the
possibility of autocorrelation in the residuals. Furthermore, to correct for both
heteroscedasticity and autocorrelation that might be present in the data, the Heteroscedasticity
and Autocorrelation Consistent (HAC) standard errors are used. The null hypothesis of the
Wald test tests whether coefficients of both TOM days and ROM days dummies are equal to
each other: D1TOM = D2ROM. When evidence is found for the TOM effect, we will enclose the
pooled regression analysis.

1.1.2 EGARCH (1,1) methodology

Although, most of the studies that focus on the foreign exchange markets use the standard
OLS method, this approach will possibly not be enough. A drawback of the standard OLS
method is that it will not correctly account for two problems: errors may be auto-correlated
and error variances may not be constant over time: heteroscedasticity. Therefore, in order to
account for the auto-correlation problem, again the term which indicates the lagged
values of the depreciation rates, is included in the model. In addition, if the variance of the
errors is not constant, this would be known as heteroscedasticity, thus heteroscedasticity
refers to changing volatility. If the errors are heteroscedastic but assumed homoscedastic, this
may lead to incorrect standard error estimates. In the context of financial time series, it is

27
unlikely that the variance of the errors will be constant over time, therefore it makes sense to
use a model which does not assume that the variance is constant. To overcome the error
variances problem, the conditional variance is modeled with the EGARCH (1,1) model, the
Exponential Generalized Autoregressive Conditional Heteroscedastic model. The EGARCH
model has an advantage over the GARCH model, because it is not necessary to impose non-
negativity constrains. Since log is used will never be negative. The conditional variance
quantifies the uncertainty about further observations, given everything that is seen so far. This
is more interesting than the volatility of the series considered as a whole (Hurvich, 2012). So
to be more specific, the conditional variance for both the DOW effect and the TOM effect is
modeled, see equation 4.

(4)

The variables used in formula 4 to determine the conditional variance are: the constant

term , the GARCH effect , the persistence in conditional volatility

irrespective of anything happening in the market , and the asymmetry or leverage

effect . The coefficient γ measures the leverage effect. A coefficient estimate of γ = 0

implies that the regression model is symmetric. When γ is lower than zero this indicates that
positive shocks will generate less volatility than negative shocks. In addition, when γ is higher
than zero this means that positive innovations will be more destabilizing than negative
innovations. Next, the coefficient β measures the persistence in conditional volatility
irrespective of what happens in the market. When the coefficient estimate for β is relatively
high this indicates that it takes a long time before volatility dies out. Finally, the GARCH

effect is an effect similar to the idea of the GARCH specification and a

positive coefficient implies that a deviation from the expected value can result in a larger
variance of the errors than would otherwise be the case (Oztürk, 2006; Su, 2010).

Next, equation 5 is used in order to investigate the existence of the DOW effect in the foreign
exchange market of the BRICS countries and the United States by using the EGARCH model.

(5)

In order to make valid inferences the heteroscedastic consistent covariance coefficients are
used. To indicate if there is evidence for the DOW effect, the Wald test is used. The null
28
hypothesis of the Wald test tests whether all coefficients of DOW dummies are equal to each
other: D1Monday = D2Tuesday = D3Wednesday = D4Thursday = D5Friday. Again when evidence is
found for the DOW effect, we will enclose the additional pooled regression analysis.

Equation 6 is used in order to investigate the existence of the TOM effect in the foreign
exchange market of the BRICS countries and the United States by using the EGARCH (1,1)
model.

(6)

Again, the heteroscedastic consistent covariance coefficients are used to avoid invalid
inferences. The Wald test is used to investigate whether evidence can be found for the
existence of a TOM effect. Therefore, the null hypothesis of the Wald test tests whether all
coefficients of the TOM days dummy and the ROM days dummy are equal to each other:
D1TOM = D2ROM. As mentioned above, we will enclose the pooled regression analysis when
evidence is found for the TOM effect.

1.2 Data
In this part we focus on the data gathering and the main characteristics of the data. Since this
empirical research emphasizes on the investigation of the DOW effect and the TOM effect in
both the foreign exchange rates of the BRICS currencies to the US Dollar and the cross-
currency exchange rates, it is useful to make a distinction in the description of the required
datasets.

1.2.1 The dataset

To investigate both the DOW effect and the TOM effect in the foreign exchange rates of the
BRICS currencies to the US Dollar, daily data is gathered from Datastream (2012) over the
period 2001-20129. As mentioned, regression equation 1 shows that the daily depreciation rate
is calculated as the growth of the BRICS value of the US Dollar. Therefore, to test for both
the day-of-the-week effect and the TOM effect, the exchange rates of the Brazilian Real to the
US Dollar, the Russian Rouble to the US Dollar, the Indian Rupee to the US Dollar, the
Chinese Yuan to the US Dollar, and the South African Rand to the US Dollar are needed. The
dataset contains daily data gathered from Datastream (2012) over the period 2001-2012.
According to regression equations 2 and 3 the lagged values of the depreciation rate are

9
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29
needed to account for the auto-correlation problem. Therefore, in both regression equations
the first order lagged values of the depreciation rates are included. This indicates that the year
2000 is also included in the dataset.
Next, to test the DOW effect and the TOM effect in the cross-currency exchange rates
of the BRICS countries and the United States, again daily data gathered from Datastream
(2012) over the period 2001-2012 is used10. However, since this data only provides useful
information to test for the presence of the DOW effect and the TOM effect in the foreign
exchange rates of the BRICS currencies to the US Dollar, an additional step must be made. As
mentioned above, now every individual BRICS currency will be the foreign currency and the
remaining four BRICS currencies plus the US Dollar will take the place of the home currency.
This provides a system with several connections, see appendix F. The lagged values of the
depreciation rates are needed to account for the auto-correlation problem. The first order
lagged values of the depreciation rates are included for both regression equations 2 and 3.
Thus, again the year 2000 is included in the dataset.

1.2.2 Data descriptive

In order to investigate some of the main characteristics of the dataset, we enclosed tables with
summary statistics of both the average daily returns of the trading days of the week: Monday,
Tuesday, Wednesday, Thursday, and Friday; and the average daily returns of the TOM and
ROM periods, see appendix G. Both tables in the appendix report the mean (%), the median
(%), the standard deviation (%), minimum (%), maximum (%), skewness, kurtosis, the
Jarque-Bera test statistics, and the number of observations. We enclosed the Jarque-Bera test
statistics in the tables, because these statistics provide information about the normality
distribution of the residuals of the dataset.
In table i, placed in appendix G, the summary statistics of the exchange rates of the
BRICS currencies to the US Dollar are reported for the period 2001-2012. The statistics are
based on the average daily returns of the trading days of the week. The number of daily
returns is the same for each exchange rate (Brazilian Real-US Dollar, Russian Rouble-US
Dollar, Indian Rupee-US Dollar, Chinese Yuan-US Dollar, and South African Rand-US
Dollar), namely 584 observations. The mean and median statistics both indicate that the
returns fluctuate around 0 for all BRICS-US exchange rates. In addition, the standard
deviation fluctuates between 0 and 1.5 for all five foreign exchange rates. The most important

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30
statistics reported in table i are the skewness and kurtosis. Since the skewness measures the
extent to which a distribution is not symmetric, and the kurtosis measures how fat the tails of
the distribution are, they both indicate whether departures from normality are found (a normal
distribution is symmetric or mesokurtic and will have a kurtosis coefficient of 3). Therefore,
the skewness and kurtosis statistics might indicate whether the unconditional variance is an
impropriate method to describe the volatility and this makes both statistics very important.
Table i shows that the distribution of the five exchange rates varies between (quite) negative
skewed to (very) positive skewed. In addition, the kurtosis coefficients for all exchange rates
are (far) above 3. Thus, the residuals are not normally distributed for all days of the week for
the Brazilian Real-US Dollar, the Russian Rouble-US Dollar, the Indian Rupee-US Dollar
exchange, the Chinese Yuan-US Dollar, and the South African Rand-US Dollar exchange
rate. Since the Jarque-Bera normality test results show that all statistics are significant, p-
value = 0.00, the null of normality is rejected at the 1% level for all five exchange rates.
In table ii, the summary statistics of the exchange rates of the BRICS currencies to the
US Dollar are reported for the period 2001-2012. The statistics are based on the average daily
returns of the TOM periods. The number of daily returns is the same for all exchange rates,
namely 674 observations. The mean and median statistics both indicate that the returns
fluctuate around 0 for all BRICS-US exchange rates. Next, the standard deviation fluctuates
between 0 and 1 for all five foreign exchange rates. Although the skewness statistics are not
extremely skewed, the skewness of the five exchange rates varies between negative and
positive skewed. In addition, the kurtosis coefficients for all exchange rates are (far) above 3.
Just like table i shows that the residuals are not normally distributed for all days of the week
for the BRICS currencies-US Dollar exchange rates, table ii reports that the residuals are not
normally distributed for the TOM period trading days of the Brazilian Real-US Dollar, the
Russian Rouble-US Dollar, the Indian Rupee-US Dollar exchange, the Chinese Yuan-US
Dollar, and the South African Rand-US Dollar exchange rate. The Jarque-Bera normality test
results show that all statistics are significant, p-value = 0.00, and therefore the null of
normality is rejected at the 1% significance level for all five exchange rates.
When observing the summary statistics of both the DOW effect and the TOM effect of
the cross-currency exchange rates11, it becomes clear that the mean and median statistics both
indicate that the returns fluctuate between 0 and 1 for all exchange rates. In addition, the
standard deviation fluctuates around 0 for all exchange rates. The coefficients for both the

11
Upon request available
12
The results of all OLS regression models are placed in tables in the31
appendices, since it turned out that the OLS model has some
skewness and kurtosis indicate that the residuals are not normally distributed for all days of
the week and for the TOM and ROM periods. The Jarque-Bera normality test results show
that all statistics are significant, p-value = 0.00. Therefore the null of normality is rejected at
the 1% level for both the DOW effect and the TOM effect in the cross-currency exchange
rates.
Next, it is important to focus on the stationarity of the dataset. Stationarity in time
series indicates that statistical characteristics e.g. mean, variance, and autocorrelation
structure, are constant over time. However, most economic time series are not stationair.
When coefficients in regression models are non-stationair this will lead to the adverse feature
that previous values of the error term will have a non-declining effect on the current value of
the dependent variable when time moves further. When the series contain more than one-unit
root, the first difference operator (Δ) is needed to induce stationarity. Since the regression
models make use of the continuously compounded returns it can be assumed, without using
the Augmented Dickey Fuller test for stationarity, that the time series are stationair. This
arises because the logarithmic difference of the continuously compounded returns is basically
the first difference operator, so stationary is already induced and no additional adjustments are
needed to properly use the dataset.
To test whether the EGARCH (1,1) regression model can be used to investigate
whether there exists evidence for the DOW effect and the TOM effect, it is important to test
for ARCH effects. Therefore, the ARCH test is used to determine whether the residuals of the
2001-2012 dataset include ARCH effects. The ARCH test can be seen as an autocorrelation
test in the squared residuals and tests whether the lags of the squared residuals have
coefficient values that are not significantly different from zero. When evidence is found for
the existence of ARCH effects in the residuals of the regression model, the OLS regression
model can be expanded to an EGARCH (1,1) model. Therefore, the results of the ARCH test
are reported in the OLS regression models of the DOW effect and the TOM effect, see the
next section.

2. Empirical results
Now that both the methodology and the data characteristics are described, an Ordinary Least
Squares (OLS) regression can be performed in order to give an answer to the research
question whether there is evidence for the presence of calendar anomalies, specifically day-
of-the-week effects and turn-of-the-month effects, in the foreign exchange markets of the
BRICS countries against the US dollar and in the cross-currency exchange rates, during the

32
period 2002-2012. Although most of the studies which focus on the foreign exchange markets
use the standard Ordinary Least Squares method, this approach will probably not be enough.
A drawback of the standard Ordinary Least Squares method is that it will not correctly
account for two problems: errors may be auto-correlated and error variances may not be
constant over time: heteroscedasticity. Therefore, when evidence is found for ARCH effects,
the OLS regression model will be followed by an EGARCH regression model to check
whether there is a difference in regression outcomes between the two methodologies.

2.1 The OLS regression model

2.1.1 BRICS-US Dollar DOW effect
To determine whether there is evidence for the presence of calendar anomalies, first a simple
regression model for the DOW effect in the BRICS currencies-US Dollar exchange rates is
modeled. As mentioned above, the regression model includes dummy variables for Monday,
Tuesday, Wednesday, Thursday, and Friday, therefore the constant term is not included. To
indicate if there is evidence for the DOW effect, the Wald test is used. The null hypothesis of
the Wald test tests whether all coefficients of DOW dummies are equal to each other:
D1Monday = D2Tuesday = D3Wednesday = D4Thursday = D5Friday. The results of the first regression
model are reported in table iii, placed in appendix G12.
Table iii shows that the estimated coefficients for Monday, Tuesday, Wednesday,
Thursday, and Friday reject the null hypothesis that the coefficients are equal in both the
Indian Rupee-US Dollar exchange rate and the Chinese Yuan-US Dollar exchange rate,
respectively at a 5% and 1% significance level. This finding suggests that evidence is found
for the existence of the DOW effect in the Rupee-US Dollar exchange rate and the Yuan-US
Dollar exchange rate. Obviously the Wald test results do not reject the null hypothesis of
equal coefficients of DOW dummies for the Real-US Dollar exchange rate, the Rouble-US
Dollar exchange rate, and the Rand-US Dollar exchange rate.
So to be more specific, when observing the reported data for India, it becomes clear
that the estimate coefficient for Monday (0.0003) exhibits the highest returns in relation to the
other days of the week. In addition, the estimate coefficient for Friday (-0.0002) reports the
lowest returns. Both coefficients are statistically significant at a 5% significance level. Next,
the Chinese results report the highest returns on Monday (8.09E-06). However this estimate
coefficient is not statistically significant. The lowest returns in relation to the other days of the

12
The results of all OLS regression models are placed in tables in the appendices, since it turned out that the OLS model has some
drawbacks in comparison with the EGARCH (1,1) model.

33
week are reported on Wednesday (-0.0002). The Wednesday coefficient is statistically
significant at a 1% significance level. The coefficients of the remaining days of the weeks
(Tuesday, Thursday, and Friday) are all significant at a 1% significance level. When
observing the reported data for Brazil, it becomes clear that the estimate coefficient for
Wednesday (0.0005) exhibits the highest returns, and that the estimate coefficient for Friday (-
0.0005) shows the lowest returns of the week. However, both coefficients are not statistically
significant at least at a 10% significance level. Next, the results for Russia show that the
estimate coefficient for Tuesday (0.0002) provides the highest returns, and the Monday
coefficient (-3.61E-06) exhibits the lowest returns. Both coefficients are not statistically
significant at least at a 10% significance level. Finally, the South African returns are the
highest on Thursday (0.0003) and the lowest on Friday (-0.0003) in relation to the other days of
the week. However both estimate coefficients are not statistically significant at least at a 10%
significance level. Since no evidence is found for the DOW effect, we will not perform the
additional pooled regression analysis.
As stated above, the ARCH LM test results indicate whether evidence is found for
ARCH effects in the model. Table iii shows that the F-statistic of the ARCH LM (5) test is
significant at the 1% significance level for the Brazilian Real-US Dollar exchange rate, the
Russian Rouble-US Dollar exchange rate, the Indian Rupee-US Dollar exchange rate, and the
South African Rand-US Dollar exchange rate. So, this suggests the presence of ARCH effects
in the mentioned exchange rates. However, the ARCH effect for the Chinese Yuan-US Dollar
exchange rate is not significant at least at a 10% significance level. This indicates that no
evidence is found for the existence of ARCH effects in the Chinese Yuan-US Dollar exchange
rate. The absence of ARCH effects in the Chinese Yuan-US Dollar exchange rate might be
explained by the fact that the Chinese exchange rate was known as a fixed exchange rate from
1995 until 2005. During this period, the Chinese Yuan was connected to the US Dollar and by
stabilizing the Chinese Yuan-US Dollar exchange rate China was able to (indirectly) stabilize
the exchange rate against many other currencies, since many financial markets are based on
the US Dollar. In 2005, the Chinese government ended the fixed exchange rate system and
introduced the managed floating currency regime. Although this allowed the People’s Bank of
China to more efficiently tailor the monetary condition to local needs as it moves toward a
more market-based financial system, there still is a stable Chinese Yuan-US Dollar exchange
rate. As a consequence of the stable exchange rate, volatility clustering which is the tendency
of large changes in the rates to be followed by large changes, and small changes to follow

34
small changes and time varying conditional volatility, are no longer motivations for using the
ARCH model (McKinnon & Schnable, 2011).

2.1.2 BRICS-US Dollar TOM effect

Next, a regression model for the TOM effect in the BRICS currencies-US Dollar exchange
rates is modeled. As mentioned, the regression model includes dummy variables for the TOM
days (the last day of the month and the first four days of the coming month), and the
remaining days (ROM). The null hypothesis of the Wald test tests whether coefficients of
both TOM days and ROM days dummies are equal to each other: D1TOM = D2ROM. The results
of the regression model are reported in table iv, placed in appendix G.
Table iv shows that the estimated coefficients for TOM days and ROM days reject the
null hypothesis of equal coefficients in the Brazilian Real-US Dollar exchange rate, the Indian
Rupee-US Dollar exchange rate, and the Chinese Yuan-US Dollar exchange rate, respectively
at a 10%, 5%, and 10% significance level. When looking more specifically at the reported
data for Brazil, it becomes clear that the estimate coefficient for the ROM days (0.0002)
exhibits higher returns than the TOM days coefficient (-0.0007). However, both coefficients are
not statistically significant at a 10% significance level. Therefore this finding does not
demonstrate the existence of a TOM effect in the Real-US Dollar exchange rate. Next, the
Indian outcomes show that the estimate coefficient for ROM days (8.29E-05) provides the
highest returns, and obviously the coefficient for the TOM days (-0.0002) the lowest returns.
The TOM days coefficient is statistically significant at a 5% significance level, while the
ROM days coefficient is not statistically significant at least at a 10% significance level. Thus,
no evidence is found for the existence of a TOM effect in the Rupee-US Dollar exchange rate.
Also, the Chinese results report the highest returns on ROM days (-0.0001), at a 5%
significance level. The coefficient for the TOM days (-0.0002) is also significant at a 5%
significance level. So also no evidence is found for the existence of a TOM effect in the
Yuan-US Dollar exchange rate. The results for Russia show that the estimate coefficient for
TOM days (0.0002) exhibits the highest returns, and obviously the coefficient for the ROM
days (-2.87E-05) the lowest returns. Both coefficients are not statistically significant at least at a
10% significance level. Finally, the South African returns are the highest on TOM days
(0.0001) in relation to the ROM days (-3.69E-05). However both estimate coefficients are not
statistically significant at least at a 10% significance level. Since evidence is found for the
TOM effect we perform the additional pooled regression analysis. However, the pooled
regression findings demonstrate that no evidence is found for TOM effects in the total dataset.

35
 In addition, table iv shows that the ARCH effect is present in the Brazilian Real-US
Dollar exchange rate, the Russian Rouble-US Dollar exchange rate, the Indian Rupee-US
Dollar exchange rate, and the South African Rand-US Dollar exchange rate, since the F-
statistic of the ARCH LM (5) test is significant at the 1% significance level for the four
mentioned exchange rates. Again no evidence is found for the existence of ARCH effects in
the Chinese Yuan-US Dollar exchange rate.

2.1.3 Cross-currency exchange rates DOW effect

Subsequently, a regression model for the DOW effect in the cross-currency exchange rates is
modeled. Again, the regression model includes dummy variables for all days of the week:
Monday, Tuesday, Wednesday, Thursday, and Friday. The null hypothesis of the Wald test
tests whether coefficients of all five weekday dummies are equal to each other:
D1Mondaycc=D2Tuesdaycc=D3Wednesdaycc=D4Thursdaycc=D5Fridaycc. The results of the regression
model are reported in table v, placed in appendix G.
Table v shows that the estimated coefficients for the five days of the week reject the
null hypothesis of equal coefficients in the US Dollar-Indian Rupee exchange rate and the US
Dollar-Chinese Yuan exchange rate, respectively at a 5% and 1% significance level. When
analyzing the reported data of the US Dollar-Indian Rupee exchange rate, it becomes clear
that Friday exhibits the highest returns (0.0002) at a 5% significance level, while Monday
shows the lowest returns (-0.0003) at a 5% significance level. Thus, this finding suggests that
evidence is found for the existence of the DOW effect. The US Dollar-Chinese Yuan
exchange rate reports the highest returns on Wednesday (0.0002) at a 1% significance level,
and the lowest returns on Monday (-8.08E-06). The returns on the remaining days of the week
(Tuesday, Thursday, and Friday) are all significant at a 1% significance level. So, evidence
for the existence of the DOW effect is found in the US Dollar-Chinese Yuan exchange rate.
Since only two cross-currencies exchange rates show evidence for the existence of the DOW
effect, we will not perform the pooled regression analysis.
Next, table v shows that the ARCH effect is present in all cross-currency exchange
rates except for the US Dollar-Chinese Yuan exchange rate, since the F-statistic of the ARCH
LM (5) test is significant at the 1% significance level for all cross-currency exchange rates
except for the US Dollar-Chinese Yuan exchange rate. Thus, no evidence is found for the
existence of ARCH effects in the US Dollar-Chinese Yuan exchange rate and therefore it is
not useful to model ARCH and GARCH effects. The absence of the ARCH effect in the US

36
Dollar-Chinese Yuan exchange rate can be explained by the existence of the stable exchange
rate between the two currencies as mentioned above.

2.1.4 Cross-currency exchange rates TOM effect

Finally, a regression model for the TOM effect in the cross-currency exchange rates is
modeled. As mentioned above, dummy variables are used for both the TOM days (the last day
of the month and the first four days of the coming month) and the ROM days (the remaining
days of the month), and again the constant term is not included. The null hypothesis of the
Wald test tests whether coefficients of both TOM days and ROM days dummies are equal to
each other in the cross-currency exchange rates: D1TOMcc = D2ROMcc. The results of the
regression model are reported in table vi, placed in appendix G.
Table vi shows that the estimate coefficients for TOM days and ROM days reject the
null hypothesis of equal coefficients in several cross-currency exchange rates. However, only
evidence for the existence of a TOM effect in the cross-currency exchange is found if the
coefficient of the TOM days has higher returns than the ROM days. It becomes clear that the
Russian Rouble-Brazilian Real exchange rate (1% sig. level), the Chinese Yuan-Brazilian
Real exchange rate (10% sig. level), the South African Rand-Brazilian Real exchange rate
(5% sig. level), the US Dollar-Brazilian Real exchange rate (10% sig. level), the Russian
Rouble-Indian Rupee exchange rate (5% sig. level), the Chinese Yuan-Indian Rupee exchange
rate (5% sig. level), the US Dollar-Indian Rupee exchange rate (5% sig. level), and the US
Dollar-Chinese Yuan exchange rate (10% sig. level) show evidence for the existence of a
TOM effect in the exchange rate. Since the F-statistic of the ARCH LM (5) test is significant
at the 1% significance level for all cross-currency exchange rates except for the US Dollar-
Chinese Yuan exchange rate, the ARCH effect is present in all cross-currency exchange rates
except for the US Dollar-Chinese Yuan exchange rate. Thus, no evidence is found for the
existence of ARCH effects in the US Dollar-Chinese Yuan exchange rate and it is not useful
to model the ARCH and GARCH effects.
Since evidence is found for the existence of TOM effects, we enclosed an additional
column in table iv in which the results of the pooled regression are reported. The results show
that in case of the pooled groups with Brazil and Russia as foreign countries, evidence is
found for the existence of the TOM effect at a 1% significance level. In addition, evidence is
found for the existence of the TOM effect in case of the pooled groups with India and South
Africa as foreign countries, at a 10% significance level. The pooled regression outcome with
China as foreign country shows that no evidence is found for the existence of the TOM effect.

37
2.2 The EGARCH (1,1) regression model
The results of the ARCH tests show that evidence is found for the existence of ARCH effects
in all exchange rates except for the Chinese Yuan-US dollar exchange rate and the US dollar-
Chinese Yuan exchange rate. Therefore it is useful to expand the OLS regression for all
exchange rates, except for the two mentioned rates, to a model that accounts for ARCH and
GARCH effects.

2.2.1 BRICS-US Dollar DOW effect

To determine whether evidence exists for the presence of calendar anomalies, first the
EGARCH regression model for the DOW effect in the BRICS currencies-US Dollar exchange
rates is modeled. The regression model includes dummy variables for Monday, Tuesday,
Wednesday, Thursday, and Friday, also the first order lag of the depreciation rate is included
(Rt-1) to account for the autocorrelation problem, and the conditional variance is added to
account for the heteroscedasticity problem. The null hypothesis of the Wald test tests whether
all coefficients of DOW dummies are equal to each other: D1Monday = D2Tuesday = D3Wednesday
= D4Thursday = D5Friday. The results of the first regression model, which involves both the
mean and variance specification, are reported in table 1. It is important to mention that the
day-of-the-week dummies are not included in the variance specification of the model. The
dummies are not recorded since it turned out that the inferences of table 1 are not altered after
removing the dummy variables.
The mean specification in table 1 shows that the estimated coefficients for the days of
the week only reject the null hypothesis of equal coefficients in the Indian Rupee-US Dollar
exchange rate, at a 10% significance level. When observing the reported data for India, it
becomes clear that the estimate coefficient for Wednesday (1.63E-05) exhibits the highest
returns in relation to the other days of the week. In addition, the estimate coefficient for
Tuesday (-4.78E-05) reports the lowest returns. However, both coefficients are not statistically
significant at least at a 10% significance level. When observing the reported data for Brazil, it
becomes clear that the estimate coefficient for Thursday (9.27E-05) exhibits the highest returns,
while the estimate coefficient for Monday (-0.0004) shows the lowest returns of the week.
However, both coefficients are not statistically significant at least at a 10% significance level.
Next, the results for Russia show that the estimate coefficient for Wednesday (0.0003) provides
the highest returns, and the Tuesday coefficient (-0.0002) exhibits the lowest returns,
respectively statistically significant at least at a 10% and 5% significance level. Finally, the
South African returns are the highest on Tuesday (0.0004) and the lowest on Thursday (-0.0004)
38
in relation to the other days of the week. Since only evidence is found for the DOW effect for
the Indian Rupee-US Dollar exchange rate, we will not perform the additional pooled
regression analysis.
The variance specification in table 1 shows that the coefficient estimate for α1 is
relatively large for all five BRICS currencies-US Dollar exchange rates, at a 1% significance
level. This implies that the volatility is sensitive for market events during the period 2001-
2012. The Brazilian Real-US Dollar exchange rate has the largest α1 of the BRICS currencies-
US Dollar exchange rates. Thus the Brazilian Real-US Dollar exchange rate is the most
sensitive for market events during the period. Next the leverage effect for the Brazilian Real-
US Dollar exchange rate and the South African Rand-US Dollar exchange rate is positive at a
1% significance level. So, positive innovations will be more destabilizing than negative
innovations. In addition, the coefficient estimate for β is relatively high (above 0.9) for the
Brazilian Real-US Dollar exchange rate, the Russian Rouble-US Dollar exchange rate, the
Indian Rupee-US Dollar exchange rate, and the South African Rand-US Dollar exchange rate,
all at a 1% significance level.

Table 1.
EGARCH (1,1) day-of the-week effect in the BRICS-US exchange rates

DOW effect in # - US
Real Rouble Rupee Rand
Dollar exchange rate
Mean specification
D1 Monday -0.41 0.08 0.01 0.07
[0.11] [0.46] [0.75] [0.85]
D2 Tuesday -0.28 -0.20 0.05 0.43
[0.25] [0.06]* [0.00]*** [0.27]
D3 Wednesday -0.17 0.25 0.02 -0.29
[0.54] [0.01]** [0.30] [0.46]
D4 Thursday 0.09 0.24 0.01 -0.42
[0.73] [0.05]** [0.69] [0.31]
D5 Friday -0.16 -0.14 0.02 -0.38
[0.53] [0.07]* [0.30] [0.31]
Rt-1 0.14 0.05 -0.00 0.06
[0.00]*** [0.18] [0.99] [0.01]***
Variance specification
α0 -0.48 -0.22 -0.63 -0.32
[0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.26 0.13 0.21 0.15
[0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0
0.09 0.03 0.01 0.05

39
Table 1. (continued)
[0.00]*** [0.10] [0.78] [0.00]***
β1 0.97 0.99 0.96 0.98
[0.00]*** [0.00]*** [0.00]*** [0.00]***
Wald test F-statistic 0.25 2.71 1.81 0.86
[0.73] [0.03]** [0.12] [0.49]
Observations 2920 2920 2920 2920
Coefficients are given in each cell followed by p-values in brackets. Significance: * = 10%, ** = 5%, *** = 1%; Null hypothesis Wald
test: all coefficients of DOW dummies are equal D1=D2=D3=D4=D5.

2.2.2 BRICS-US Dollar TOM effect

Second, the EGARCH regression model for the TOM effect in the BRICS currencies-US
Dollar exchange rates is modeled. The null hypothesis of the Wald test tests whether both the
TOM dummy and ROM dummy are equal to each other: D1TOM = D2ROM. The mean
specification in table 2 shows that the estimated coefficients for the turn of the month days
and the remaining days only reject the null hypothesis of equal coefficients in the Brazilian
Real-US Dollar exchange rate, and the Russian Rouble-US Dollar exchange rate, both at a 1%
significance level. The reported data for Brazil shows that the estimate coefficient for the
ROM days (7.80E-05) exhibits the highest returns, significant at a 1% significance level, in
relation with the TOM days’ coefficient (-0.001), not significant at least at a 10% significance
level. When observing the reported data for Russia, it becomes clear that the estimate
coefficient for the TOM days (0.0004) exhibits the highest returns, at a 1% significance level.
The estimate coefficient for the ROM days (-0.0001) shows the lowest returns of the week,
however the estimate coefficient is not significant at least at a 10% significance level. In
addition we performed the pooled regression analysis. It becomes clear that also the pooled
regression outcomes show that the TOM effect is present at a 1% significance level.
The variance specification in table 2 shows that the TOM dummies are not taken into
account in the variance specification of the model, since inferences are not changing after
removing the variables. In addition, table 2 reports that the coefficient estimate for α1 is
relatively large for all five BRICS currencies-US Dollar exchange rates, at a 1% significance
level. This implies that the volatility is sensitive for market events during the period 2001-
2012. The Indian Rupee-US Dollar exchange rate has the largest α1 of the five BRICS
currencies-US Dollar exchange rates. Thus the Indian Rupee-US Dollar exchange rate is the
most sensitive for market events during the period. Next the leverage effect for the Brazilian
Real-US Dollar exchange rate, the Indian Rupee-US Dollar exchange rate, and the South
African Rand-US Dollar exchange rate is positive at a 1% significance level. So, positive

40
innovations will be more destabilizing than negative innovations. In addition, the coefficient
estimate for β is relatively high (above 0.9) for the Brazilian Real-US Dollar exchange rate,
the Russian Rouble-US Dollar exchange rate, and the South African Rand-US Dollar
exchange rate, all at a 1% significance level. The β is also relatively high (above 0.8) for the
Indian-Rupee-US Dollar exchange rate at a 1% significance level.

Table 2.
EGARCH (1,1) turn-of-the-month effect in the BRICS-US exchange rates

TOM effect in # - US Real Rouble Rupee Rand Pooled

currencies
Dollar exchange rate
Mean specification
D1 TOM -1.27 0.38 0.05 -0.37 0.23
[0.00]*** [0.00]*** [0.13] [0.31] [0.00]***
D2 ROM 0.08 -0.10 0.01 -0.05 -0.00
[0.55] [0.17] [0.64] [0.79] [0.98]
Rt-1 0.13 0.05 0.06 0.06 0.08
[0.00]*** [0.19] [0.10] [0.01]*** [0.00]***
Variance specification
α0 -0.49 -0.11 -2.19 -0.32 -0.37
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.27 0.14 0.44 0.15 0.23
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0 0.09 0.03 0.13 0.05 0.01
[0.00]*** [0.26] [0.01]** [0.00]*** [0.76]
β1 0.97 0.99 0.85 0.98 0.98
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Wald test F-statistic 23.15 14.27 1.22 0.62 62.19
[0.00]*** [0.00]*** [0.27] [0.43] [0.00]***
Observations 2920 2920 2920 2920 11680
Coefficients are given in each cell followed by p-values in brackets. Significance: * = 10%, ** = 5%, *** = 1%; Null hypothesis Wald
test: all coefficients of TOM dummies are equal D1=D2.

2.2.3 Cross-currency exchange rates DOW effect

Third, the EGARCH regression model for the day-of-the-week-effect in the cross-currency
exchange rates is modeled. The null hypothesis of the Wald test tests whether coefficients of
the five dummy variables for the days of the week are equal to each other in the cross-
currency exchange rates: D1Mondaycc = D2Tuesdaycc = D3Wednesdaycc = D4Thursdaycc = D5Fridaycc.
The results of the regression model are reported in table 3. Table 3 shows that the estimate
coefficients for the days of the week reject the null hypothesis of equal coefficients in several
cross-currency exchange rates. The mean specification in table 9 makes clear that no evidence
is found for the existence of a DOW effect in the cross-currency exchange rate of BRICS

41
countries and the United States. Therefore, we will not perform the additional pooled
regression analysis.
The variance specification in table 3 shows that the dummy variables are not taken
into account in this part of the model. In addition, table 3 reports that the coefficient estimate
for α1 relatively large is for all cross-currency exchange rates, at a 1% significance level. This
implies that the volatility is sensitive for market events for the whole dataset during the period
2001-2012. Next, the leverage effect for the Brazilian Real-Russian Rouble exchange rate, the
Brazilian Real-Indian Rupee exchange rate, the South African Rand-Indian Rupee exchange
rate, the Brazilian Real-Chinese Yuan exchange rate, and the South African-Chinese Yuan
exchange rate is positive at a 1% significance level. In addition, the leverage effect for the
South African Rand-Russian Rouble exchange rate is positive at a 5% significance level. So,
positive innovations will be more destabilizing than negative innovations for these exchange
rates. In addition, the coefficient estimate for β is relatively high (above 0.9) for all cross-
currency exchange rates at a 1% significance level. However, also this exception has
relatively high β coefficients (above 0.8) at a 5% significance level.

Table 3.
EGARCH (1,1): DOW effect in the cross-currency exchange rates

DOW effect in # -
Rouble Rupee Yuan Rand US Dollar
Real exchange rate
Mean specification
D1 Monday 0.17 0.47 0.40 0.34 0.41
[0.60] [0.10]* [0.12] [0.42] [0.11]
D2 Tuesday 0.26 0.28 0.17 0.30 0.28
[0.38] [0.27] [0.48] [0.42] [0.25]
D3 Wednesday 0.09 -0.034 -0.05 -0.54 0.17
[0.78] [0.90] [0.84] [0.17] [0.54]
D4 Thursday -0.21 -0.16 -0.25 -0.08 -0.09
[0.49] [0.57] [0.36] [0.87] [0.73]
D5 Friday 0.11 -0.04 0.18 0.10 0.16
[0.72] [0.87] [0.50] [0.80] [0.53]
Rt-1 0.07 0.12 0.13 0.03 0.14
[0.00]*** [0.00]*** [0.00]*** [0.11] [0.00]***
Variance specification
α0 -0.50 -0.47 -0.47 -0.27 -0.48
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.27 0.25 0.25 0.16 0.26
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0 -0.07 -0.08 -0.09 -0.01 -0.09
[0.00]*** [0.00]*** [0.00]*** [0.65] [0.00]***
β1 0.97 0.97 0.97 0.98 0.97
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***

42
Table 3. (continued)
Wald test F-statistic 0.36 0.94 0.87 0.83 0.50
[0.84] [0.44] [0.48] [0.51] [0.73]
Observations 2920 2920 2920 2920 2920
DOW effect in # -
Rouble exchange rate Real Rupee Yuan Rand US Dollar
Mean specification
D1 Monday -0.18 0.05 -0.14 0.09 -0.10
[0.60] [0.62] [0.12] [0.82] [0.25]
D2 Tuesday -0.26 -0.27 0.10 0.33 0.19
[0.38] [0.02]** [0.33] [0.44] [0.06]*
D3 Wednesday -0.08 -0.23 -0.23 -0.14 -0.24
[0.81] [0.03]** [0.01]** [0.75] [0.02]**
D4 Thursday 0.21 -0.08 -0.30 -0.29 -0.26
[0.49] [0.50] [0.01]** [0.53] [0.03]**
D5 Friday -0.11 -0.10 -0.12 -0.26 0.13
[0.72] [0.30] [0.12] [0.51] [0.10]*
Rt-1 0.07 0.02 0.02 -0.00 0.05
[0.00]*** [0.47] [0.65] [0.92] [0.20]
Variance specification
α0 -0.50 -0.25 -0.21 -0.29 -0.21
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.27 0.21 0.14 0.16 0.14
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0 0.07 -0.01 -0.03 0.03 -0.03
[0.00]*** [0.58] [0.20] [0.02]** [0.10]
β1 0.97 0.99 0.99 0.98 0.99
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Wald test F-statistic 0.36 1.52 1.26 0.37 2.66
[0.84] [0.19] [0.28] [0.83] [0.03]**
Observations 2920 2920 2920 2920 2920
DOW effect in # -
Rupee exchange rate Real Rouble Yuan Rand US Dollar
Mean specification
D1 Monday -0.48 -0.05 0.01 -0.16 -0.01
[0.09]* [0.61] [0.87] [0.66] [0.88]
D2 Tuesday -0.29 0.27 0.00 0.44 0.02
[0.27] [0.02]** [0.99] [0.26] [0.47]
D3 Wednesday 0.03 0.23 -0.03 -0.24 0.00
[0.90] [0.03]** [0.47] [0.53] [0.97]
D4 Thursday 0.16 0.08 0.04 -0.41 0.01
[0.57] [0.50] [0.14] [0.33] [0.77]
D5 Friday 0.04 0.10 -0.04 -0.07 0.02
[0.87] [0.30] [0.14] [0.86] [0.53]
Rt-1 0.11 0.02 0.04 0.03 0.01
[0.00]*** [0.48] [0.13] [0.10]* [0.70]
Variance specification
α0 -0.47 -0.25 -0.64 -0.33 -1.01
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.25 0.21 0.39 0.16 0.23
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0 0.08 0.01 0.00 0.04 -0.02

43
Table 3. (continued)
[0.00]*** [0.58] [0.94] [0.01]*** [0.97]
β1 0.97 0.99 0.97 0.98 0.93
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Wald test F-statistic 0.95 1.53 1.22 0.67 0.16
[0.43] [0.19] [0.30] [0.61] [0.96]
Observations 2920 2920 2920 2920 2920
DOW effect in # -
Yuan exchange rate Real Rouble Rupee Rand
Mean specification
D1 Monday -0.40 0.15 0.03 0.11
[0.12] [0.08]* [0.62] [0.77]
D2 Tuesday -0.17 -0.10 0.01 0.52
[0.48] [0.32] [0.84] [0.18]
D3 Wednesday 0.05 0.24 0.02 -0.20
[0.84] [0.01]*** [0.65] [0.61]
D4 Thursday 0.25 0.30 -0.04 -0.32
[0.36] [0.01]*** [0.20] [0.44]
D5 Friday -0.18 0.12 0.05 -0.26
[0.51] [0.13] [0.22] [0.49]
Rt-1 0.13 0.02 0.05 0.05
[0.00]*** [0.66] [0.10]* [0.01]**
Variance specification
α0 -0.47 -0.21 -0.79 -0.31
[0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.25 0.14 0.35 0.16
[0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0 0.09 0.03 0.01 0.05
[0.00]*** [0.19] [0.70] [0.00]***
β1 0.97 0.99 0.96 0.98
[0.00]*** [0.00]*** [0.00]*** [0.00]***
Wald test F-statistic 0.87 1.39 0.85 0.80
[0.48] [0.23] [0.50] [0.52]
Observations 2920 2920 2920 2920
DOW effect in # -
Rand exchange rate Real Rouble Rupee Yuan US Dollar
Mean specification
D1 Monday -0.34 -0.12 0.12 -0.11 -0.07
[0.41] [0.76] [0.74] [0.77] [0.85]
D2 Tuesday -0.29 -0.33 -0.44 -0.52 -0.43
[0.43] [0.44] [0.26] [0.18] [0.27]
D3 Wednesday 0.52 0.14 0.24 0.20 0.28
[0.18] [0.74] [0.53] [0.61] [0.46]
D4 Thursday 0.08 0.29 0.41 0.32 0.43
[0.86] [0.53] [0.33] [0.44] [0.30]
D5 Friday -0.10 0.30 0.07 0.26 0.38
[0.80] [0.46] [0.86] [0.48] [0.31]
Rt-1 0.03 -0.01 0.04 0.05 0.06
[0.12] [0.96] [0.09]* [0.01]** [0.01]***
Variance specification
α0 -0.27 -0.29 -0.33 -0.31 -0.31

44
Table 3. (continued)
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.16 0.16 0.16 0.16 0.15
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0 0.01 -0.03 -0.04 -0.05 -0.05
[0.64] [0.02]** [0.01]*** [0.00]*** [0.00]***
β1 0.98 0.98 0.98 0.98 0.98
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Wald test F-statistic 0.79 0.41 0.66 0.81 0.87
[0.53] [0.80] [0.62] [0.52] [0.48]
Observations 2920 2920 2920 2920 2920
Coefficients are given in each cell followed by p-values in brackets. Significance: * = 10%, ** = 5%, *** = 1%; Null hypothesis Wald
test: all coefficients of DOW dummies are equal D1=D2=D3=D4=D5.

2.2.4 Cross-currency exchange rates TOM effect

Finally, the EGARCH regression model for the TOM effect in the cross-currency exchange
rates is modeled. The null hypothesis of the Wald test tests whether coefficients of both TOM
days and ROM days dummies are equal to each other in the cross-currency exchange rates:
D1TOMcc = D2ROMcc. The results of the regression model are reported in table 4.
Table 4 shows that the estimate coefficients for TOM days and ROM days reject the
null hypothesis of equal coefficients in several cross-currency exchange rates. As mentioned
above, only evidence for the existence of a TOM effect in the cross-currency exchange is
found if the coefficient of the TOM days has higher returns than the coefficient of the ROM
days. The mean specification in table 4 makes clear that the Russian Rouble-Brazilian Real
exchange rate (1% sig. level), the Indian Rouble-Brazilian Real exchange rate (1% sig. level),
the Chinese Yuan-Brazilian Real exchange rate (1% sig. level), the US Dollar-Brazilian Real
exchange rate (10% sig. level), the Brazilian Real-Russian Rouble exchange rate (1% sig.
level), the Indian Rupee-Russian Rouble exchange rate (1% sig. level), the Chinese Yuan-
Russian Rouble exchange rate (1% sig. level), the US Dollar-Russian Rouble (1% sig. level),
the Brazilian Real-Indian Rupee exchange rate (1% sig. level), the Russian Rouble-Indian
Rupee exchange rate (1% sig. level), the Brazil Real-Chinese Yuan exchange rate (1% sig.
level), the Russian Rouble-Chinese Yuan exchange rate (1% sig. level), and the Indian Rupee-
Chinese Yuan (5% sig. level) show evidence for the existence of a TOM effect in the
exchange rate. So, in addition we performed the pooled regression analysis. What can be seen
is that in case of the pooled groups with Brazil, Russia and India as foreign country, evidence
is found for the existence of the TOM effect at a 1% significance level. In addition also
evidence is found for the existence of the TOM effect in case of the pooled group with China

45
as foreign country, however at a 5% significance level. No evidence for the TOM effect is
found in the pooled group with South Africa as foreign country.
The variance specification in table 4, which does not includes dummy variables for the
TOM effect, shows that the coefficient estimate for α1 is relatively large for all cross-currency
exchange rates at a 1% significance level. This implies that the volatility is sensitive for
market events for the whole dataset during the period 2001-2012. Next, the leverage effect for
the Brazilian Real-Russian Rouble exchange rate, the Brazilian Real-Indian Rupee exchange
rate, the South African Rand-Indian Rupee exchange rate, the Brazilian Real-Chinese Yuan
exchange rate, and the South African-Chinese Yuan exchange rate is positive at a 1%
significance level. So, positive innovations will be more destabilizing than negative
innovations for these exchange rates. In addition, the coefficient estimate for β is relatively
high (above 0.9) for all cross-currency exchange rates at a 1% significance level, except for
the US Dollar-Indian Rupee exchange rate. However, also this exception has relatively high β
coefficients (above 0.8) at a 1% significance level.

Table 4.
EGARCH (1,1): TOM effect in the cross-currency exchange rates

TOM effect in # - Pooled

Rouble Rupee Yuan Rand US Dollar
Real exchange rate currencies
Mean specification
D1 TOMcc 1.24 0.86 1.25 0.48 1.27 0.95
[0.00]*** [0.00]*** [0.00]*** [0.20] [0.00]*** [0.00]***
D2 ROMcc -0.23 -0.09 -0.18 -0.16 -0.08 -0.15
[0.15] [0.51] [0.18] [0.43] [0.55] [0.03]**
Rt-1 0.06 0.10 0.12 0.03 0.13 0.09
[0.00]*** [0.00]*** [0.00]*** [0.11] [0.00]*** [0.00]***
Variance specification
α0 -0.51 -0.48 -0.48 -0.27 -0.48 -0.42
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.27 0.25 0.27 0.16 0.27 0.25
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0 -0.08 -0.08 -0.09 -0.01 -0.09 -0.07
[0.00]*** [0.00]*** [0.00]*** [0.62] [0.00]*** [0.00]***
β1 0.97 0.97 0.97 0.98 0.97 0.98
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Wald test F-statistic 22.20 11.29 26.14 2.28 23.19 67.45
[0.00]*** [0.00]*** [0.00]*** [0.13] [0.00]*** [0.00]***
Observations 2920 2920 2920 2920 2920 14600
TOM effect in # - Pooled
Rouble exchange rate Real Rupee Yuan Rand US Dollar
currencies
Mean specification
D1 TOMcc -1.24 -0.49 -0.41 -0.21 -0.38 -0.45
[0.00]*** [0.00]*** [0.00]*** [0.59] [0.00]*** [0.00]***
D2 ROMcc 0.23 -0.01 -0.08 -0.04 0.10 -0.07

46
Table 4. (continued)
[0.15] [0.83] [0.18] [0.87] [0.19] [0.05]**
Rt-1 0.06 0.01 0.01 -0.02 0.04 0.02
[0.00]*** [0.80] [0.91] [0.92] [0.21] [0.16]
Variance specification
α0 -0.51 -0.25 -0.22 -0.29 -0.20 -0.25
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.27 0.22 0.14 0.15 0.14 0.19
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0 0.08 -0.01 -0.02 0.03 -0.03 0.00
[0.00]*** [0.74] [0.30] [0.02]** [0.26] [0.70]
β1 0.97 0.99 0.99 0.98 0.99 0.99
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Wald test F-statistic 22.14 15.40 9.52 0.15 13.71 27.04
[0.00]*** [0.00]*** [0.00]*** [0.70] [0.00]*** [0.00]***
Observations 2920 2920 2920 2920 2920 14600
TOM effect in # - Pooled
Rupee exchange rate Real Rouble Yuan Rand US Dollar
Currencies
Mean specification
D1 TOMcc -0.86 0.49 0.02 0.04 -0.00 0.00
[0.00]*** [0.00]*** [0.51] [0.91] [0.96] [0.51]
D2 ROMcc 0.10 0.01 -0.02 -0.10 -0.00 -0.01
[0.51] [0.81] [0.43] [0.61] [0.81] [0.00]***
Rt-1 0.10 0.01 0.05 0.04 0.073 0.05
[0.00]*** [0.79] [0.08]* [0.09]* [0.05]** [0.00]***
Variance specification
α0 -0.48 -0.25 -0.73 -0.33 -1.82 -0.34
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.25 0.22 0.37 0.16 0.41 0.25
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0 0.08 0.01 -0.01 0.04 -0.08 0.01
[0.00]*** [0.74] [0.67] [0.01]*** [0.11] [0.20]
β1 0.97 0.99 0.96 0.98 0.88 0.99
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Wald test F-statistic 11.43 15.79 1.14 0.13 0.03 27.47
[0.00]*** [0.00]*** [0.29] [0.72] [0.88] [0.00]***
Observations 2920 2920 2920 2920 2920 14600
TOM effect in # - Pooled
Yuan exchange rate Real Rouble Rupee Rand
currencies
Mean specification
D1 TOMcc -1.25 0.43 -0.04 -0.35 0.11
[0.00]*** [0.00]*** [0.23] [0.33] [0.00]***
D2 ROMcc 0.18 0.10 0.03 0.04 0.29
[0.18] [0.08]* [0.14] [0.84] [0.00]***
Rt-1 0.12 0.01 0.05 0.05 0.06
[0.00]*** [0.91] [0.06]* [0.01]** [0.00]***
Variance specification
α0 -0.48 -0.22 -0.79 -0.31 -0.37
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.27 0.15 0.36 0.16 0.23
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0 0.09 0.02 0.02 0.05 0.01

47
Table 4. (continued)
[0.00]*** [0.27] [0.54] [0.00]*** [0.38]
β1 0.97 0.99 0.96 0.98 0.10
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Wald test F-statistic 26.19 9.86 4.01 0.93 6.32
[0.00]*** [0.00]*** [0.05]** [0.34] [0.01]**
Observations 2920 2920 2920 2920 14600
TOM effect in # - Rand Pooled
exchange rate Real Rouble Rupee Yuan US Dollar
currencies
Mean specification
D1 TOMcc -0.46 0.21 -0.06 0.35 0.37 0.01
[0.22] [0.59] [0.87] [0.33] [0.30] [0.96]
D2 ROMcc 0.17 0.04 0.11 -0.04 0.05 0.05
[0.43] [0.87] [0.59] [0.84] [0.80] [0.55]
Rt-1 0.03 -0.02 0.04 0.05 0.06 0.03
[0.11] [0.91] [0.08]* [0.01]** [0.01]*** [0.00]***
Variance specification
α0 -0.27 -0.29 -0.32 -0.31 -0.32 -0.29
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
α1 0.16 0.15 0.16 0.16 0.15 0.16
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
γ0 0.01 -0.03 -0.04 -0.05 -0.05 -0.03
[0.62] [0.02]** [0.01]*** [0.00]*** [0.00]*** [0.00]***
β1 0.98 0.98 0.98 0.98 0.98 0.98
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Wald test F-statistic 2.17 0.16 0.17 0.92 0.62 0.06
[0.14] [0.69] [0.68] [0.34] [0.43] [0.81]
Observations 2920 2920 2920 2920 2920 14600
Coefficients are given in each cell followed by p-values in brackets. Significance: * = 10%, ** = 5%, *** = 1%; Null hypothesis Wald
test: all coefficients of TOM dummies are equal D1=D2.

2.3 OLS vs. EGARCH (1,1) results

As stated above, many studies that focus on calendar anomalies in foreign exchange markets
have used the standard OLS regression methodology. General beliefs among academics are
that the OLS method is simple to use, but that it has several shortcomings that can lead to
incorrect inferences and these wrong inferences can influence the accuracy of the study.
Therefore, the ARCH/GARCH models are developed to generate more precise outcomes.
Since it is unlikely that the variance of the errors in financial time series is constant, the
ARCH/GARCH models are a major improvement as compared to the OLS models. The
EGARCH model even has the advantage that it models the logarithm of the conditional
variance and thus allows negative parameters. Since we used both the OLS regression and the
EGARCH (1,1) regression in this study it is interesting to observe whether there are indeed
differences between the two models. In table 5 we give an overview of the mentioned DOW
effects and TOM effects in both methodologies.

48
Table 5.
OLS vs. EGARCH (1,1) results

Table iii. OLS DOW Table 1. EGARCH (1,1) DOW

India-US 2.83 [0.02]** Rouble-US 2.71 [0.03]**
China-US1 3.76 [0.01]***

Table iv. OLS TOM Table 2. EGARCH (1,1) TOM

Brazil-US 2.97 [0.09]** Brazil-US 23.15 [0.00]***
India-US 6.18 [0.01]** Russia-US 14.27 [0.00]***
China-US1 3.12 [0.08]* Pooled-US 62.19 [0.00]***

Table v. OLS DOW Table 3. EGARCH (1,1) DOW

US-India 2.86 [0.02]** US-Russia 2.66 [0.03]**
US-China1 3.76 [0.01]***

Table vi. OLS TOM Table 4. EGARCH (1,1) TOM

Russia-Brazil 6.87 [0.01]*** Russia-Brazil 22.20 [0.00]***
China-Brazil 3.50 [0.06]* India-Brazil 11.29 [0.00]***
South Africa-Brazil 3.90 [0.05]** China-Brazil 26.14 [0.00]***
US-Brazil 2.97 [0.09]* US-Brazil 23.19 [0.00]***
Pooled-Brazil 16.62 [0.00]*** Pooled-Brazil 67.45 [0.00]***
Brazil-Russia 6.86 [0.01]*** Brazil-Russia 22.14 [0.00]***
Table 5. (continued)
India-Russia 6.05 [0.01]** India-Russia 15.40 [0.00]***
Pooled-Russia 7.32 [0.01]*** China-Russia 9.52 [0.00]***
Russia-India 6.05 [0.01]** US-Russia 13.71 [0.00]***
China-India 8.75 [0.00]*** Pooled-Russia 27.04 [0.00]***
US-India 6.07 [0.01]** Brazil-India 11.43 [0.00]***
Pooled-India 3.04 [0.08]* Russia-India 15.79 [0.00]***
Brazil-China 3.51 [0.06]* Pooled-India 27.47 [0.00]***
US-China1 3.12 [0.08]* Brazil-China 26.19 [0.00]***
Brazil-S.Africa 3.90 [0.05]** Russia-China 9.86 [0.00]***
Pooled-S.Africa 3.03 [0.08]* India China 4.01 [0.05]**
Pooled-China 6.32 [0.01]**
1
Since for both the Chinese Yuan-US Dollar exchange rate and the US Dollar-Chinese Yuan exchange rate no ARCH effects are found, no
EGARCH (1,1) regression is modeled. Therefore the standard OLS results are used in the concluding remarks.

When comparing the significant results of both OLS regressions and EGARCH (1,1)
regressions for both the DOW effect and the TOM effect, it becomes clear that they indeed do
differ. When the OLS regression model outcomes provide evidence for the existence of the
DOW effect or the TOM effect, two possibilities are created for the EGARCH (1,1) model
outcomes. First, it becomes clear that some statistically significant OLS outcomes disappear
in the EGARCH (1,1) results. Second, it is demonstrated that several not statistically
significant outcomes in the OLS regression are statistically significant in the EGARCH (1,1)
regression. So clearly the EGARCH (1,1) model shows different results for the DOW effect
and the TOM effect in relation with the OLS outcomes. Since the EGARCH method avoids
problems of ARCH and asymmetric effects, it is more likely that the EGARCH (1,1) results

49
are more accurate. Therefore we will rely on the EGARCH (1,1) estimation results for the
concluding remarks.

50
 3. Optimal investment strategies
Since the focus in this work lies on foreign exchange markets, this section focuses on the
optimal investment strategy for an international investor in foreign exchange markets to
indicate whether it is economically significant to generate excess returns on statistically
significant TOM effects. We do not formulate an optimal investment strategy on DOW effects
since the DOW effects are just in a few cases significant. Therefore it is unlikely that an
investment strategy on DOW effects in the BRICS/US exchange rates will result in an
economically meaningful interpretation.

3.1 Investment strategy without transaction costs

Because the traditional work of Markowitz did not incorporate transaction costs associated
with buying and selling equities, the first step in this investment strategy does not allow
transaction costs (Fernando, 2000). Following the work of Veraart (2011), we assume that the
objective of the investor in foreign exchange markets is to maximize the mark-to-market
value of the portfolio. Therefore, the optimal rule for the trader is to invest in those currencies
which have the best rates of return, or equally, generate the highest possible excess returns;
we will call this strategy investment case A. In addition, it is also interesting to observe an
investment strategy in which the investor has the objective to generate the highest possible
excess returns while taking into account the level of riskiness of the investment; we will call
this strategy investment case B. So in this second case, the mark-to-market value of the
portfolio is maximized by using the restriction that the portfolio standard deviation is equal or
lower than the lowest standard deviation in the individual exchange rates. Since the standard
deviation indicates the level of riskiness of the investment, the goal is to minimize the
standard deviation. Both investment cases, with and without the incorporation of the level of
riskiness of the investment, can be divided into six investment scenarios which all use a fixed
home currency and varying foreign currencies. In addition, all scenarios for both investment
cases are confronted with two additional restrictions: first, the portfolio weights are not
allowed to take on negative values (no short selling) and second, the total of all portfolio
weights must add up to 100% (full investment).
Table vii, placed in appendix G, reports both the modeling of the optimal portfolios
while taking into account the BRICS-US foreign exchange rates and while taking into account
the cross-currency foreign exchange rates for both investment cases. In case of the BRICS-US
foreign exchange rates scenario, the US Dollar is taken as the fixed foreign currency and the
BRICS currencies are the varying home currencies. In the cross-currency scenarios,

51
alternately one of the BRICS currencies is taken as the fixed foreign currency and the
remaining four BRICS currencies and the US Dollar are the varying home currencies. Since
we assume that the optimal rule is to invest in currencies with the best return rates, first the
portfolio weights are estimated in such a way that the maximum amounts of returns are
realized with and without the incorporation of the level of risk of the investment. Table vii
shows that for both investment cases A and B, all six scenarios show that diversification
results in much higher (portfolio) Sharpe ratios than the investor otherwise will get by
investing in the individual exchange rates. Since the Sharpe ratio indicates how well investors
are compensated in terms of returns for the undertaken risk, it is desirable to prefer high
Sharpe ratios. So, it becomes clear that diversification is providing higher average returns and
that at the same time diversification results in lower risk. However, the six scenarios for
investment cases A and B do not all offer the same Sharpe ratio, and obviously not all average
returns and risks are the same. Since the objective of the investor in foreign exchange markets
is to maximize the mark-to-market value of the portfolio, it is good to make a distinction in
the level of the returns of the six scenarios, to end up with an optimal investment strategy.
Table vii reports that for both investment cases, with and without the incorporation of the
level of risk of the investment, scenario 5 provides the highest average portfolio returns.
To show what happens when an investor in foreign exchange markets maximizes the
mark-to-market value of the portfolio by using scenario 5, we assume an initial investment
amount of 100 US Dollar for both investment cases in 2001. To maximize the portfolio
returns the investor will use an investment strategy around the turn of the month days, in order
to use possible TOM effects. This indicates that at the last trading day of the month the
investor will invest his initial investment amount according to the optimal portfolio
percentage plus possible returns which are realized by the TOM effect in the previous month.
On the fourth trading day of the following month, the investor converts his initial amount plus
potential excess returns back into the home currency, and this value will be the starting
amount of the following investment month. So, it is important to note that we assume that the
investor does not do anything with the investments during the ROM days. Thus, the investor
only earns dividends during the end and beginning of every month (TOM days). In case of the
investment strategy without the incorporation of the level of risk it becomes clear that the
initial investment amount of 100 US Dollar has risen to 150.09 US Dollar in 2012. Thus, the
TOM effect investment strategy without transaction costs and without the incorporation of
risk has resulted in a 50.09% increase. In case of the investment strategy with the
incorporation of the level of risk, it becomes clear that the initial investment amount of 100

52
US Dollar has risen to 135.72 US Dollar in 2012. So, the TOM effect investment strategy
without transaction costs but with the incorporation of risk has resulted in a 35.72% increase
which is less than the investment strategy which does not take the level of risk into account 13.
In figure 1, the compounded returns of both investment cases A and B are given for the period
2001-2012. It becomes clear that both investment cases show evidence for the existence of
TOM effects at statistically significant levels. In addition figure 1 shows that the generated
excess returns indicate that both investment cases are also economically relevant. However, it
is obvious that investment case A is more economically relevant, since this case has
experienced higher growth.

Figure 1.
Compounded returns without transaction costs

3.2 Investment strategy with transaction costs

However, since the optimal portfolio also depends on the total cost of transactions, transaction
costs are not trivial enough to be neglected. Therefore, the second step of this investment
strategy incorporates transaction costs. Since each investor will do everything possible to
avoid high transaction costs, we assume that the total transaction costs in each portfolio are
proportional to the total value of all investments. Therefore, we use a fixed percentage, 3% of
the total weights, as a proxy of the transaction costs in each scenario, since part of the
portfolio weights before rebalancing (portfolio without transaction costs) is spent to rebalance
the portfolio. So when transaction costs are increased, smaller amounts of principal weights
are available to be allocated in the new portfolio. Thus, in order to receive the same portfolio
returns without transaction costs, it is necessary to reach higher returns (Asumeng-Denteh,
2004). Table viii, placed in appendix G, reports the optimal investment strategy for the
previous six scenarios for both investment cases while taking into account the transaction

13
Calculations available on request

53
costs which are spent to rebalance the portfolio. It becomes clear that the optimal portfolio
weights are changed in all six scenarios for both investment cases and since the inclusion of
transaction costs leads to a loss of the total possible portfolio weight, also the Sharpe ratios of
all six scenarios for both cases have declined. This indicates that the investors are less
compensated (in terms of returns) for the undertaken risk than without the transaction costs.
However since the objective of the investor in foreign exchange markets is unchanged, and
therefore still wants to maximize the mark-to-market value of the portfolio, the optimal
investment strategy is the scenario in which the highest average portfolio returns are realized.
Table viii reports that scenario 5 still delivers the highest average portfolio returns and
likewise the highest Sharpe ratio for the investment cases with and without the incorporation
of the level of risk. Thus, the optimal investment strategy for the trader with the inclusion of
transaction costs but without the incorporation of the level of risk is to invest 97% in the
Russian Rouble-Chinese Yuan foreign exchange rate. In addition, the optimal investment with
the incorporation of both transaction costs and the level of risk of the investment is to invest
85.47% in the US Dollar-Chinese Yuan foreign exchange rate. So, the remaining four
exchange rates only account for 14.53% of the optimal portfolio.
To show what happens when an investor in foreign exchange markets is maximizing
the mark-to-market value of the portfolio by using scenario 5, we again assume an initial
investment amount of 100 US Dollar (97 US Dollar after subtracting the transaction costs) for
both investment cases A and B in 2001. Following the same investment strategy as mentioned
above, it becomes clear that in case of the investment strategy without the incorporation of the
level of risk, the initial investment amount of 100 US Dollar has risen to 145.36 US Dollar in
2012. Thus, the TOM effect investment strategy with transaction costs but without the
incorporation of risk has resulted in a 45.36% increase. In case of the investment strategy with
the incorporation of the level of risk, it becomes clear that the initial investment amount of
100 US Dollar has risen to 130.97 US Dollar in 2012. So, the TOM effect investment strategy
with transaction costs and with the incorporation of risk has resulted in a 30.97% increase
which is less than the investment strategy which does not take the level of risk into account14.
In figure 2, the compounded returns of both investment cases A and B with the incorporation
of transaction costs are given for the period 2001-2012. Again, we can see that both
investment cases show evidence for the existence of TOM effects at statistically significant
levels. In addition, figure 2 shows that the generated excess returns indicate that both

14
Calculations available on request

54
investment cases are also economically relevant. Once again, it becomes clear that the
investment without the incorporation of the level of risk is more economically relevant, since
this case has experienced higher growth.

Figure 2.
Compounded returns with transaction costs

55
Conclusion
As stated, yet not much attention is paid to the presence of calendar-anomaly effects in
emerging markets. As a consequence of the shift in the current economic global power, it is
very interesting to examine the existence of calendar effects in emerging markets, because
they are likely to become key players in the global financial market. Since the BRICS
countries are pursuing growth opportunities abroad and because of their improved policies at
home, they are playing a prominent role in the global business and cross-border investment.
Therefore, it is not unlikely that the BRICS countries will become the new major players in
the (nearby) future.
In order to investigate whether evidence is found for the existence of the DOW effect
and the TOM effect in the BRICS foreign exchange markets, we used both the standard OLS
methodology and the EGARCH (1,1) method. However, since the EGARCH (1,1) model
correctly accounts for both the autocorrelation and heteroscedasticity problems and because of
the incorporation of the leverage effect, which makes it possible to take negative parameters
into account, it is more likely that the EGARCH (1,1) estimation results are more accurate
than the OLS estimation results. The comparison between the OLS and EGARCH (1,1)
estimation results makes clear that the significance levels for both the DOW effect and the
TOM effect are higher in the EGARCH (1,1) outcomes. This indicates that it is indeed more
likely to correctly conclude whether evidence is found for calendar anomalies in the BRICS-
US foreign exchange markets and their cross-currency exchange rates, by using the EGARCH
(1,1) results.
Based on the EGARCH (1,1) results, it becomes clear that no DOW effect is found in
the BRICS-US foreign exchange rates, except for the Russian Rouble-US Dollar exchange
rate. Since no ARCH effects are found in the Chinese Yuan-US Dollar exchange rate we
assume that the standard OLS outcomes for this exchange rate are correct. So in addition, also
evidence is found for the DOW effect in the Chinese Yuan-US Dollar. Next, also no DOW
effects are found in the cross-currency exchange rates, except for the Brazilian Real-US
Dollar exchange rate, the Russian Real-US Dollar exchange rate, and the pooled-US Dollar
exchange rate. We also assume that the DOW effect is present in the US Dollar-Chinese Yuan
exchange rate (based on standard OLS results). When focusing on the TOM effects in the
BRICS-US foreign exchange rates, the EGARCH (1,1) results show that no evidence is found
for the TOM effect, except for the US Dollar-Russian Rouble exchange rate and in addition
(based on OLS results) the US Dollar-Chinese Yuan exchange rate. In contrast, evidence is

56
found for the existence of TOM effects in most cross-currency exchange rates, except for the
exchange rates that involve the South African Rand.
Finally, we formulated an investment advice for the international investor who aims to
generate excess returns on statistically significant TOM effects. The modeling of the optimal
portfolio with the inclusion of the transaction costs of rebalancing the portfolio but without
the inclusion of the level of risk, indicates that the optimal investment strategy for the investor
is to invest (rounded) 100% in the Russian Rouble-Chinese Yuan exchange rate. An initial
investment of 100 US Dollar in 2001 has risen to 145.36 US Dollar in 2012 (45.36%
increase). Next, the modeling of the optimal portfolio with the inclusion of transaction costs
and with the inclusion of the level of risk, indicates that the optimal investment strategy
requires an investment of 85% in the US-Dollar-Chinese Yuan exchange rate, (rounded) 8%
in the Indian Rupee-Chinese Yuan exchange rate, and (rounded) 4% in the Russian Rouble-
Chinese Yuan exchange rate. An initial investment of 100 US Dollar in 2001 has risen to
130.97 US Dollar in 2012 (30.97% increase). So, when observing both investment cases it
becomes clear that the TOM effects are present at statistically significant levels and in
addition the generated excess returns show that both investment cases are also economically
relevant.

Discussion
Although the main purpose of this paper is to test whether both the DOW effect and the TOM
effect exist in the BRICS foreign exchange markets, further research might be useful to
formulate a more detailed explanation why the calendar anomalies are present in some
exchange rates and why they are absent in other exchange rates, during the 2001-2012 period.
Meanwhile, also a question mark can be placed by the chosen time period. In 2001,
O’Neill mentioned that Brazil, Russia, India, and China were capable to get a much larger
force in the world economy over the next fifty years. However, he said nothing about the
prospects of the South African economy. South Africa joined the BRICs of O’Neill in 2010
on the invitation of China. So, the time period 2001-2012 might not be a completely correct
choice for the South African regressions. Therefore, further research might require a different
sample period for the exchange rates whereby the South African Rand is involved.
Finally, it is worth to analyze the included investment advice. It is important to
mention that the included investment advice is optimal only when taking into account the
imposed conditions. In addition, we did not formulate an optimal investment strategy on
DOW effects. Therefore, we cannot exactly establish whether the generation of excess returns

57
on DOW effects is economically relevant. Therefore, further research might be useful to
formulate a more detailed investment strategy.

58
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Appendix
Appendix A, Forecast of the World Ranking of the biggest economies in 2050.

Global Sherpa, 2012. BRIC Countries – Background, Latest News, Statistics, and Original Articles. Globalization, World
Rankings and International Development from a Positive, Comparative Perspective.

Appendix B, Statistics BRICS countries in relation with world statistics

Population, mln Land area, thousand sq. GDP
people km Current (US$)
2010 2010 2010
Brazil 194,946,470 8,459,420 2,087,889,553,822
Russia 141,750,000 16,376,870 1,479,819,314,058
India 1,170,938,000 2,973,190 1,727,111,096,363
China 1,338,299,512 9,327,480 5,926,612,009,750
South Africa 49,991,300 1,214,470 363,703,902,727
World 6,840,507,003 129,710,719 63,123,887,517,709
% BRICS in World 42% 30% 18%
Word dataBank, 2012.

63
Appendix C, Currency distribution of global foreign exchange market turnover

Bank for International Settlements, 2010. Triennial Central Bank Survey, Report on global foreign exchange market activity
in 2010.

64
Appendix D, Geography of currency trading

McCauley, R.N., Scatigna, M., 2011. Foreign Exchange Trading in Emerging Currencies: More Financial, More Offshore.
Bank for International Settlements, Quarterly Review.

65
Appendix E, Daily average foreign exchange rate BRICS currencies / US Dollar
# - currency per 1 US $ 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Brazilian Real 2.92 3.08 2.93 2.43 2.18 1.95 1.84 1.99 1.75 1.67 1.75

Russian Rouble 31.34 30.69 28.81 28.29 27.19 25.58 24.85 31.74 30.37 29.39 30.54

Indian Rupee 48.75 46.73 45.44 44.24 45.45 41.47 43.67 48.95 48.26 48.26 48.26

Chinese Yuan 8.28 8.28 8.28 8.19 7.97 7.61 6.95 6.83 6.77 6.46 6.31

South African Rand 10.50 7.55 6.44 6.37 6.77 7.05 8.26 8.42 7.32 7.26 7.80

Datastream, 2012

Appendix F, Daily average foreign exchange rate cross currencies

# - currency per 1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Brazilian Real
Russian Rouble 11.06 10.03 9.86 11.69 12.50 13.17 13.70 16.01 17.28 17.57 17.42

Indian Rupee 17.25 15.28 15.56 18.28 20.91 21.33 24.05 24.80 27.46 28.92 27.54

Chinese Yuan 2.93 2.71 2.83 3.38 3.67 3.92 3.86 3.47 3.85 3.87 3.60

South African Rand 3.75 2.46 2.20 2.63 3.12 3.63 4.52 4.22 4.16 4.33 4.45

United States Dollar 0.35 0.33 0.34 0.41 0.46 0.51 0.56 0.51 0.57 0.60 0.57

Datastream, 2012

# - currency per 1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Russian Rouble
Brazilian Real 0.09 0.10 0.10 0.09 0.08 0.08 0.07 0.06 0.06 0.06 0.06

Indian Rupee 1.56 1.52 1.58 1.56 1.67 1.62 1.76 1.55 1.59 1.65 1.58

Chinese Yuan 0.26 0.27 0.29 0.29 0.29 0.30 0.28 0.22 0.22 0.22 0.21

South African Rand 0.34 0.25 0.22 0.23 0.25 0.28 0.33 0.26 0.24 0.25 0.26

United States Dollar 0.03 0.03 0.03 0.04 0.04 0.04 0.04 0.03 0.03 0.03 0.03

Datastream, 2012

# - currency per 1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Indian Rupee
Brazilian Real 0.06 0.07 0.06 0.06 0.05 0.05 0.04 0.04 0.04 0.04 0.04

Russian Rouble 0.64 0.65 0.63 0.64 0.60 0.62 0.57 0.65 0.63 0.61 0.63

Chinese Yuan 5.89 5.65 5.49 5.40 5.70 5.45 6.30 7.17 7.13 7.47 7.65

South African Rand 4.67 6.22 7.08 6.96 6.75 5.88 5.32 5.88 6.61 6.68 6.20

United States Dollar 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02

Datastream, 2012

66
# - currency per 1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Chinese Yuan
Brazilian Real 0.35 0.37 0.35 0.30 0.27 0.26 0.26 0.29 0.26 0.26 0.28

Russian Rouble 3.79 3.71 3.48 3.45 3.41 3.36 3.58 4.65 4.49 4.55 4.84

Indian Rupee 5.89 5.65 5.49 5.40 5.70 5.45 6.30 7.17 7.13 7.47 7.65

South African Rand 1.27 0.91 0.78 0.78 0.85 0.93 1.19 1.23 1.08 1.12 1.24

United States Dollar 0.12 0.12 0.12 0.12 0.13 0.13 0.14 0.15 0.15 0.15 0.16

Datastream, 2012

# - currency per 1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
S.African Rand
Brazilian Real 0.28 0.41 0.46 0.38 0.32 0.28 0.22 0.24 0.24 0.23 0.23

Russian Rouble 3.00 4.09 4.49 4.45 4.05 3.63 3.04 3.80 4.16 4.06 3.92

Indian Rupee 4.67 6.22 7.08 6.96 6.75 5.88 5.32 5.88 6.61 6.68 6.20

Chinese Yuan 0.79 1.10 1.29 1.29 1.19 1.08 0.85 0.82 0.93 0.90 0.81

United States Dollar 0.10 0.13 0.16 0.16 0.15 0.14 0.12 0.12 0.14 0.14 0.13

Datastream, 2012

67
Appendix G, Tables

Table i.
Summary Statistics DOW during period 2001-2012

Real – US Dollar Monday Tuesday Wednesday Thursday Friday All Data

Day-of-the-week
Mean (%) -0.02 0.00 0.05 -0.01 -0.05 -0.01
Median (%) -0.02 0.00 -0.02 0.00 0.00 0.00
Std. 1.01 0.90 1.10 1.03 1.00 1.01
< Dev. (%)
Skewness 0.60 0.24 1.72 -1.13 -1.27 0.11
Kurtosis 9.40 7.37 15.58 17.87 18.01 14.61
Jarque-Bera 1032.40 4706.07 4139.60 5506.23 5640.33 16403.51
(Probability) 0.00 0.00 0.00 0.00 0.00 0.00
Observations 584 584 584 584 584 2920
Rouble – US Dollar Monday Tuesday Wednesday Thursday Friday All Data
Day-of-the-week
Mean (%) -0.00 0.03 0.02 -0.02 -0.02 0.00
Median (%) 0.00 0.00 0.00 0.00 0.00 0.00
Std. 0.46 0.50 0.47 0.45 0.47 0.47
< Dev. (%)
Skewness 1.75 0.97 1.47 0.47 1.02 1.14
Kurtosis 18.15 12.52 11.85 13.21 20.89 15.30
Jarque- Bera 5886.93 2295.83 2113.54 2560.72 7892.88 19033.82
(Probability) 0.00 0.00 0.00 0.00 0.00 0.00
Observations 584 584 584 584 584 2920
Rupee – US Dollar Monday Tuesday Wednesday Thursday Friday All Data
Day-of-the-week
Mean (%) 0.03 0.01 -0.01 0.00 -0.02 0.00
Median (%) 0.00 0.00 0.00 0.00 0.00 0.00
Std. 0.34 0.29 0.30 0.26 0.25 0.47
< Dev. (%)
Skewness -0.94 0.27 1.00 -0.18 0.01 -0.02
Kurtosis 23.27 21.51 18.47 17.78 10.42 20.66
Jarque- Bera 10081.35 8348.40 5917.60 5320.36 1338.45 37959.49
(Probability) 0.00 0.00 0.00 0.00 0.00 0.00
Observations 584 584 584 584 584 584
Yuan – US Dollar Monday Tuesday Wednesday Thursday Friday All Data
Day-of-the-week
Mean (%) 0.00 -0.01 -0.01 -0.01 -0.01 0.01
Median (%) 0.00 0.00 0.00 0.00 0.00 0.00
Std. 0.08 0.07 0.06 0.11 0.07 0.08
< Dev. (%)
Skewness -1.26 0.02 -1.81 -9.96 -1.54 -5.86
Kurtosis 12.87 14.35 15.21 187.67 11.73 146.82
Jarque-Bera 2523.46 3135.21 3946.39 839482.30 2083.45 2533153.00
(Probability) 0.00 0.00 0.00 0.00 0.00 0.00
Observations 584 584 584 584 584 2920

68
Table i. (continued)
Rand – US Dollar Monday Tuesday Wednesday Thursday Friday All Data
Day-of-the-week
Mean (%) 0.00 0.02 -0.02 0.03 -0.03 -0.00
Median (%) 0.01 0.02 -0.08 -0.04 -0.03 -0.01
Std. Dev. (%) 1.08 1.07 1.16 1.24 1.10 1.13
<
Skewness 0.06 0.05 0.17 1.34 -0.37 0.34
Kurtosis 5.60 4.12 6.18 11.53 10.45 8.18
Jarque-Bera 165.23 30.80 248.55 1946.16 1363.61 3314.28
(Probability) 0.00 0.00 0.00 0.00 0.00 0.00
Observations 584 584 584 584 584 2920

Table ii.
Summary Statistics TOM period during 2001-2012

# - US Dollar Real Rouble Rupee Yuan Rand

Turn-of-the-month
Mean (%) -0.07 0.02 -0.02 -0.01 0.01
Median (%) -0.05 0.00 0.00 0.00 0.01
Std.
< Dev. (%) 1.06 0.45 0.28 0.07 1.10
Skewness -0.49 1.85 -0.51 -0.19 0.27
Kurtosis 15.15 24.09 15.58 18.47 4.60
Jarque-Bera 4170.53 12881.46 4474.96 6727.60 79.69
(Probability) 0.00 0.00 0.00 0.00 0.00
Observations 674 674 674 674 674

# - US Dollar Real Rouble Rupee Yuan Rand

Rest-of-the-month
Mean (%) 0.02 -0.00 0.01 -0.01 -0.00
Median (%) 0.00 0.00 0.00 0.00 -0.02
Std.
< Dev. (%) 1.00 0.48 0.29 0.08 1.14
Skewness 0.33 0.96 0.10 -6.72 0.36
Kurtosis 14.32 13.17 21.92 160.34 9.09
Jarque-Bera 12035.93 10033.95 33496.05 2333749.00 3513.42
(Probability) 0.00 0.00 0.00 0.00 0.00
Observations 2246 2246 2264 2264 2264

69
Table iii.
OLS regression: DOW effect in the BRICS-US exchange rates

DOW effect in # - US
Dollar exchange rate Real Rouble Rupee Yuan Rand
D1 Monday -0.12 -0.01 0.30 0.01 0.04
[0.78] [0.99] [0.03]** [0.82] [0.93]
D2 Tuesday 0.01 0.29 0.07 -0.11 0.22
[0.98] [0.15] [0.57] [0.00]*** [0.61]
D3 Wednesday 0.53 0.13 -0.08 -0.15 -0.23
[0.27] [0.49] [0.52] [0.00]*** [0.64]
D4 Thursday -0.11 -0.19 0.01 -0.13 0.30
[0.79] [0.32] [0.96] [0.00]*** [0.57]
D5 Friday -0.46 -0.16 -0.24 -0.11 -0.35
[0.23] [0.43] [0.03]** [0.00]*** [0.43]
Rt-1 0.07 0.09 0.07 -0.06 0.03
[0.21] [0.03]** [0.10] [0.16] [0.14]
Wald test F-statistic 0.69 1.13 2.83 3.76 0.36
[0.60] [0.34] [0.02]** [0.00]*** [0.84]
ARCH LM (5) 223.95 55.40 54.20 0.23 85.50
[0.00]*** [0.00]*** [0.00]*** [0.95] [0.00]***
Observations 2920 2920 2920 2920 2920
Coefficients are given in each cell followed by p-values in brackets. Significance: *= 10%, ** = 5%, *** = 1%; Dummy coefficient x1000.
Null hypothesis Wald test: all coefficients of DOW dummies are equal D1=D2=D3=D4=D5.

Table iv.

OLS regression: TOM effect in the BRICS-US exchange rates

TOM effect in # - US Pooled
Dollar exchange rate Real Rand Rupee Yuan Rand
currencies
D1 TOM -0.67 0.17 -0.23 -0.06 0.11 -0.14
[0.12] [0.33] [0.04]** [0.03]** [0.79] [0.36]
D2 ROM 0.16 -0.03 0.08 -0.11 -0.04 0.04
[0.43] [0.78] [0.18] [0.00]*** [0.88] [0.62]
Rt-1 0.07 0.09 0.07 -0.06 0.03 0.05
[0.22] [0.03]** [0.12] [0.16] [0.14] [0.02]**
Wald test F-statistic 2.97 0.98 6.18 3.12 0.10 1.08
[0.09]* [0.32] [0.01]** [0.08]* [0.76] [0.30]
ARCH LM (5) 224.79 55.39 54.67 0.24 84.55 651.35
[0.00]*** [0.00]*** [0.00]*** [0.95] [0.00]*** [0.00]***
Observations 2920 2920 2920 2920 2920 11680
Coefficients are given in each cell followed by p-values in brackets. Significance: * = 10%, ** = 5%, *** = 1%; Null hypothesis Wald
test: all coefficients of TOM dummies are equal D1=D2.

70
Table v.
OLS regression: DOW effect in the cross currency exchange rates

DOW effect in # -
Rouble Rupee Yuan Rand US Dollar
Real exchange rate
D1 Mondaycc 0.12 0.42 0.14 0.17 0.12
[0.79] [0.29] [0.74] [0.73] [0.78]
D2 Tuesdaycc 0.30 0.06 -0.12 0.22 -0.01
[0.45] [0.87] [0.74] [0.63] [0.98]
D3 Wednesdaycc -0.36 -0.60 -0.66 -0.76 -0.53
[0.46] [0.21] [0.17] [0.12] [0.27]
D4 Thursdaycc -0.07 0.11 -0.01 0.41 0.11
[0.87] [0.79] [0.98] [0.47] [0.79]
D5 Fridaycc 0.28 0.22 0.37 0.11 0.46
[0.53] [0.55] [0.34] [0.81] [0.23]
Rt-1 0.01 0.05 0.07 0.06 0.07
[0.94] [0.35] [0.21] [0.02]** [0.21]
Wald test F-statistic 0.37 0.76 0.78 0.082 0.69
[0.83] [0.55] [0.54] [0.51] [0.60]
ARCH LM (5) 209.19 187.81 219.94 85.17 223.95
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
]
Observations 2920 2920 2920 2920 2920
DOW effect in # -
Rouble exchange rate Real Rupee Yuan Rand US Dollar
D1 Mondaycc -0.12 0.32 0.03 0.09 0.00
[0.79] [0.18] [0.88] [0.85] [0.98]
D2 Tuesdaycc -0.30 -0.21 -0.40 -0.07 -0.29
[0.49] [0.38] [0.05]* [0.89] [0.15]
D3 Wednesdaycc 0.36 -0.21 -0.28 -0.38 -0.13
[0.46] [0.34] [0.16] [0.46] [0.49]
D4 Thursdaycc 0.07 0.16 0.07 0.44 0.19
[0.87] [0.45] [0.71] [0.43] [0.32]
D5 Fridaycc -0.28 -0.09 0.07 -0.19 0.16
[0.53] [0.70] [0.72] [0.69] [0.43]
Rt-1 0.01 0.02 0.06 -0.02 0.09
[0.94] [0.64] [0.15] [0.34] [0.03]**
Wald test F-statistic 0.37 1.22 1.389 0.36 1.13
[0.83] [0.30] [0.24] [0.84] [0.34]
ARCH LM (5) 209.19 74.79 54.40 70.47 55.40
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Observations 2920 2920 2920 2920 2920
DOW effect in # -
Rupee exchange rate Real Rouble Yuan Rand US Dollar
D1 Mondaycc -0.43 -0.32 -0.28 -0.25 -0.30
[0.29] [0.36] [0.05]* [0.03]** [0.03]**
D2 Tuesdaycc -0.06 0.21 -0.18 -0.07 -0.07
[0.87] [0.18] [0.14] [0.57] [0.57]
D3 Wednesdaycc 0.60 0.21 -0.06 0.08 0.08
[0.21] [0.38] [0.67] [0.74] [0.52]
D4 Thursdaycc -0.11 -0.16 -0.12 0.29 -0.01
[0.79] [0.45] [0.30] [0.57] [0.96]

71
Table v. (continued)
D5 Fridaycc -0.22 0.09 0.15 -0.10 0.24
[0.06]* [0.70] [0.18] [0.82] [0.03]**
Rt-1 0.05 0.02 0.05 0.01 0.07
[0.35] [0.64] [0.18] [0.64] [0.10]
Wald test F-statistic 0.77 1.22 1.78 0.24 2.86
[0.55] [0.30] [0.13] [0.92] [0.02]**
ARCH LM (5) 187.83 74.79 47.49 81.68 54.20
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Observations 2920 2920 2920 2920 2920
DOW effect in # - Yuan
exchange rate Real Rouble Rupee Rand US Dollar
D1 Mondaycc -014 -0.03 0.28 0.01 -0.01
[0.74] [0.88] [0.05]* [0.95] [0.82]
D2 Tuesdaycc 0.12 0.40 0.18 0.33 0.11
[0.74] [0.05]* [0.14] [0.44] [0.00]***
D3 Wednesdaycc 0.66 0.28 0.06 -0.01 0.15
[0.17] [0.16] [0.67] [0.86] [0.00]***
D4 Thursdaycc 0.01 -0.07 0.12 0.42 0.13
[0.98] [0.71] [0.30] [0.42] [0.00]***
]
D5 Fridaycc -0.37 -0.07 -0.15 -0.24 0.11
[0.34] [0.72] [0.18] [0.58] [0.00]***
Rt-1 0.07 0.06 0.05 0.03 -0.06
[0.21] [0.15] [0.18] [0.18] [0.16]
Wald test F-statistic 0.78 1.39 1.78 0.34 3.76
[0.54] [0.24] [0.13] [0.85] [0.01]***
ARCH LM (5) 219.94 53.40 47.49 83.94 0.23
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.95]
Observations 2920 2920 2920 2920 2920
DOW effect in # -
Rand exchange rate Real Rouble Rupee Yuan US Dollar
D1 Mondaycc -0.17 -0.09 0.25 -0.03 -0.04
[0.73] [0.85] [0.54] [0.95] [0.93]
D2 Tuesdaycc -0.22 0.07 -0.15 -0.33 -0.22
[0.29] [0.89] [0.73] [0.44] [0.61]
D3 Wednesdaycc -0.76 0.38 0.16 0.09 0.23
[0.12] [0.46] [0.74] [0.86] [0.64]
D4 Thursdaycc -0.41 -0.44 -0.29 -0.42 -0.30
[0.47] [0.43] [0.57] [0.42] [0.57]
D5 Fridaycc -0.11 0.19 0.10 0.24 0.35
[0.81] [0.69] [0.82] [0.58] [0.43]
Rt-1 0.06 -0.02 0.01 0.03 0.03
[0.02]** [0.34] [0.64] [0.18] [0.14]
Wald test F-statistic 0.82 0.36 0.24 0.34 0.36
[0.51] [0.84] [0.92] [0.85] [0.84]
ARCH LM (5) 85.14 70.47 81.68 83.94 85.50
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Observations 2920 2920 2920 2920 2920
Coefficients are given in each cell followed by p-values in brackets. Significance: * = 10%, ** = 5%, *** = 1%; Null hypothesis Wald
test: all coefficients of DOW dummies are equal D1=D2=D3=D4=D5.

72
Table vi.
OLS regression: TOM+ effect in the cross currency exchange rates

TOM effect in # - Pooled

Rouble Rupee Yuan Rand US Dollar
Real exchange rate currencies
D1 TOMcc 1.03 0.46 0.63 0.81 0.67 0.67
[0.02]** [0.27] [0.14] [0.07]* [0.12] [0.00]***
D2 ROMcc -0.24 -0.08 -0.26 -0.21 -0.16 -0.18
[0.28] [0.67] [0.19] [0.42] [0.43] [0.06]*
Rt-1 0.01 0.05 0.07 0.06 0.07 0.05
[0.99] [0.36] [0.23] [0.02]** [0.22] [0.02]**
Wald test F-statistic 6.87 1.34 3.50 3.90 2.96 16.62
[0.01]*** [0.25] [0.06]* [0.05]** [0.09]* [0.00]***
ARCH LM (5) 212.47 188.34 221.02 86.36 224.79 869.75
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Observations 2920 2920 2920 2920 2920 14600
TOM effect in # - Pooled
Real Rupee Yuan Rand US Dollar
Rouble exchange rate currencies
D1 TOMcc -1.03 -0.44 -0.21 -0.18 -0.17 -0.36
[0.02]** [0.03]** [0.21] [0.70] [0.33] [0.01]***
D2 ROMcc 0.24 0.12 -0.07 0.02 0.03 0.06
[0.28] [0.28] [0.49] [0.92] [0.78] [0.45]
Rt-1 0.01 0.02 0.06 -0.02 0.09 0.01
[0.99] [0.69] [0.15] [0.33] [0.03] [0.90]
Wald test F-statistic 6.86 6.05 0.52 0.15 0.97 7.32
[0.01]*** [0.01]** [0.47] [0.70] [0.32] [0.01]***
ARCH LM (5) 212.46 74.90 54.32 69.50 55.39 758.62
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Observations 2920 2920 2920 2920 2920 14600
TOM effect in # - Pooled
Real Rouble Yuan Rand US Dollar
Rupee exchange rate currencies
D1 TOMcc -0.46 0.44 0.19 0.36 0.23 0.16
[0.27] [0.03]** [0.09]* [0.38] [0.04]** [0.20]
D2 ROMcc 0.08 -0.12 -0.18 -0.12 -0.08 0.09
[0.67] [0.28] [0.01]*** [0.59] [0.18] [0.18]
Rt-1 0.05 0.02 0.05 0.01 0.07 0.03
[0.36] [0.69] [0.20] [0.64] [0.12] [0.18]
Wald test F-statistic 1.34 6.05 8.75 1.05 6.07 3.04
[0.25] [0.01]** [0.00]*** [0.31] [0.01]** [0.08]*
ARCH LM (5) 188.36 74.90 47.64 81.64 54.68 752.49
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Observations 2920 2920 2920 2920 2920 14600
TOM effect in # - Pooled
Real Rouble Rupee Rand US Dollar
Yuan exchange rate currencies
D1 TOMcc -0.63 0.21 -0.19 0.16 0.06 -0.07
[0.14] [0.21] [0.09]* [0.70] [0.03]** [0.58]
D2 ROMcc 0.26 0.07 0.18 0.06 0.11 0.13
*** ***
[0.19] [0.50] [0.00] [0.77] [0.00] [0.05]**
Rt-1 0.07 0.06 0.05 0.03 -0.06 0.05

73
Table vi. (continued)
[0.23] [0.15] [0.20] [0.18] [0.16] [0.00]***
Wald test F-statistic 3.51 0.52 8.74 0.04 3.12 2.06
[0.06]* [0.47] [0.00]*** [0.85] [0.08]* [0.15]
ARCH LM (5) 211.02 54.32 47.64 83.27 0.24 835.60
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.95] [0.00]***
Observations 2920 2920 2920 2920 2920 14600
TOM effect in # - Pooled
Real Rouble Rupee Yuan US Dollar
Rand exchange rate currencies
D1 TOMcc -0.81 0.18 -0.36 -0.16 -0.11 -0.30
[0.07]* [0.70] [0.38] [0.70] [0.79] [0.11]
D2 ROMcc 0.21 -0.02 0.12 -0.07 0.04 0.07
[0.42] [0.92] [0.59] [0.77] [0.88] [0.51]
Rt-1 0.06 -0.02 0.01 0.03 0.03 0.02
[0.02]** [0.33] [0.64] [0.18] [0.14] [0.03]**
Wald test F-statistic 3.90 0.15 1.05 0.04 0.10 3.03
[0.05]** [0.70] [0.36] [0.85] [0.76] [0.08]
ARCH LM (5) 86.36 69.50 81.64 83.27 84.55 407.55
[0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]*** [0.00]***
Observations 2920 2920 2920 2920 2920 14600
Coefficients are given in each cell followed by p-values in brackets. Significance: * = 10%, ** = 5%, *** = 1%; Null hypothesis Wald test:
all coefficients of TOM dummies are equal D1=D2.

74
Table vii
Investment strategies without transaction costs

Table 12. Investment strategies without transaction costs

Scenario 1 A B Scenario 2 A B Scenario 3 A B
Constraint - σ Constraint - σ Constraint - σ
lowest
Yuan- lowest
Yuan- lowest
Yuan-
variable
US variable
US variable
Rouble
Value Dollar Value Dollar Value
- [0.0008] - [0.0099] - [0.0048]
Weights (%) Weights (%) Weights (%)
Real-US Dollar 0.00 0.00 Rouble-Real 100.00 56.00 Real-Rouble 0.00 0.00
Rouble-US Dollar 100.00 4.48 Rupee-Real 0.00 34.00 Rupee-Rouble 100.00 24.96
Rupee-US Dollar 0.00 10.00 Yuan-Real 0.00 0.00 Yuan-Rouble 0.00 0.00
Yuan-US Dollar 0.00 85.52 Rand-Real 0.00 10.00 Rand-Rouble 0.00 0.00
Rand-US Dollar 0.00 0.00 US Dollar-Real 0.00 0.00 US Dollar-Rouble 0.00 75.04
Portfolio Results Portfolio Results Portfolio Results
μportfolio 0.0000 -0.0001 μportfolio 0.0001 0.0001 μportfolio -0.0001 -0.0002
σportfolio 0.0047 0.0008 σ 0.0111 0.0099 σportfolio 0.0055 0.0048
portfolio
Sharpe Ratio 0.0037 -0.0964 Sharpe Ratio 0.0045 0.0046 Sharpe Ratio -0.0014 -0.0032
Scenario 4 A B Scenario 5 A B Scenario 6 A B
Constraint - σ Constraint - σ Constraint - σ
lowest
US lowest
US lowest
Rupee-
variable
Dollar- variable
Dollar- variable
Rand
Rupee Yuan
Value Value Value
- [0.0029] - [0.0008] - [0.0111]
Weights (%) Weights (%) Weights (%)
Real-Rupee 0.00 0.00 Real-Yuan 0.00 0.00 Real-Rand 0.00 1.58
Rouble-Rupee 100.00 40.13 Rouble-Yuan 100.00 1.48 Rouble-Rand 100.00 21.60
Yuan-Rupee 0.00 0.00 Rupee-Yuan 0.00 5.51 Rupee-Rand 0.00 76.82
Rand-Rupee 0.00 2.76 Rand-Yuan 0.00 0.08 Yuan-Rand 0.00 0.00
US Dollar-Rupee 0.00 57.11 US Dollar-Yuan 0.00 92.94 US Dollar-Rand 0.00 0.00
Portfolio Results Portfolio Results Portfolio Results
x1000
μ 0.0001 0.0001 x1000
μ 0.0001 0.0001 x1000
μ 0.0000 0.0001
portfolio portfolio portfolio
σportfolio 0.0056 0.0029 σportfolio 0.0048 0.0008 σportfolio 0.0123 0.0111
Sharpe Ratio 0.0013 -0.0013 Sharpe Ratio 0.0232 0.1165 Sharpe Ratio 0.0016 0.0013
Investment cases: A= investment case without the inclusion of the level of risk of the investment; B= investment case with the inclusion of the
level of risk of the investment.

75
Table viii
Investment strategies with transaction costs

Table 13. Investment strategies with transaction costs

Scenario 1 A B Scenario 2 A B Scenario 3 A B
Constraint - σ Constraint - σ Constraint - σ
lowest
Yuan- lowest
Yuan- lowest
Yuan-
variable
US variable
US variable
Rouble
Value Dollar Value Dollar Value
- [0.0008] - [0.0099] - [0.0048]
Trans. Costs 3% 3% Trans. costs 3% 3% Trans. Costs 3% 3%
Weights (%) Weights (%) Weights (%)
Real-US Dollar 0.00 0.00 Rouble-Real 97.00 64.00 Real-Rouble 0.00 0.000
Rouble-US Dollar 97.00 5.36 Rupee-Real 0.00 29.00 Rupee-Rouble 97.00 47.61
Rupee-US Dollar 0.00 12.09 Yuan-Real 0.00 0.00 Yuan-Rouble 0.00 0.00
Yuan-US Dollar 0.00 79.55 Rand-Real 0.00 4.00 Rand-Rouble 0.00 0.00
Rand-US Dollar 0.00 0.00 USDollar-Real 0.00 0.00 USDollar-Rouble 0.00 49.39
Portfolio Results Portfolio Results Portfolio Results
μportfolio 0.0001 -0.0001 μportfolio 0.0001 0.0001 μportfolio -0.0001 -0.0001
σportfolio 0.0046 0.0008 σ 0.0108 0.0099 σportfolio 0.0053 0.0048
portfolio
Sharpe Ratio 0.0038 -0.0891 Sharpe Ratio 0.0046 0.0046 Sharpe Ratio -0.0013 -0.0026
Scenario 4 A B Scenario 5 A B Scenario 6 A B
Constraint - σ Constraint - σ Constraint - σ
lowest
US lowest
US lowest
Rupee-
variable
Dollar- variable
Dollar- variable
Rand
Rupee Yuan
Value Value Value
- [0.0029] - [0.0008] - [0.0111]
Trans. Costs 3% 3% Trans. costs 3% 3% Trans. Costs 3% 3%
Weights (%) Weights (%) Weights (%)
Real-Rupee 0.00 0.00 Real-Yuan 0.00 0.00 Real-Rand 0.00 0.00
Rouble-Rupee 97.00 42.00 Rouble-Yuan 97.00 3.66 Rouble-Rand 97.00 50.80
Yuan-Rupee 0.00 0.00 Rupee-Yuan 0.00 7.87 Rupee-Rand 0.00 46.20
Rand-Rupee 0.00 2.32 Rand-Yuan 0.00 0.00 Yuan-Rand 0.00 0.00
US Dollar-Rupee 0.00 52.68 US Dollar-Yuan 0.00 85.47 US Dollar-Rand 0.00 0.00
Portfolio Results Portfolio Results Portfolio Results
x1000
μ 0.0001 0.0001 x1000
μ 0.0001 0.0001 x1000
μ 0.0001 0.0001
portfolio portfolio portfolio
σportfolio 0.0053 0.0029 σportfolio 0.0046 0.0008 σportfolio 0.0119 0.0111
Sharpe Ratio 0.0013 -0.0011 Sharpe Ratio 0.0233 0.1138 Sharpe Ratio 0.0016 0.0015
Investment cases: A= investment case without the inclusion of the level of risk of the investment; B= investment case with the inclusion of the
level of risk of the investment.

76