A calendar effect: Weekend overreaction (and subsequent reversal) in spot FX rates

•We investigate the weekend overreaction in spot foreign exchange markets.•After a large weekend price change, markets reverse in the following week.•We develop a reversal trading strategy to exploit this effect.•The strategy can generate abnormal risk-adjusted returns in out-of-sample test.•These abnormal returns suggest that FX markets may be weak-form inefficient.

This paper investigates a calendar effect, namely the weekend overreaction, in spot foreign exchange markets of 8 major and 9 emerging currencies. We find that after a large price difference between Friday close and subsequent Monday open, most markets are likely to reverse in multiple horizons during the following week, which is consistent with the overreaction hypothesis. We develop a reversal trading strategy to exploit this effect which we show are robust to transaction costs and interest rates. In the out-of-sample test, the strategy is able to generate abnormal risk-adjusted returns, which suggests that these currency markets might be weak-form inefficient.