Impact of the day-of-the-week effect on diversification of exchange rate risks

Diversification and day-of-the-week effects on exchange rate risks have been well documented in the literature, but separately. This paper studies empirically the interaction of diversification and day-of-the-week effects on exchange rate risks. The results show that different days have great impact on diversification of exchange rate risks, particularly on skewness and kurtosis. With an increase in the portfolio size, the average skewness increases on Monday, Thursday and Friday but decreases on Tuesday, Wednesday and Saturday. The average kurtosis decreases with an increase in the portfolio size on Wednesday and Thursday. On the other days, however, the average kurtosis decreases first, and then increases. The results suggest that unsystematic skewness and kurtosis change signs across days of the week. An analysis of consistency over time shows that the portfolio effect on standard deviation is highly stable while the effect on kurtosis is relatively less stable. However, the portfolio effect on skewness is highly unstable over time. Investors should be aware of the day-of-the-week effect on diversification in the foreign exchange markets if they want to maximize their returns and minimize their risks.