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

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