Impact of trading hours extensions on foreign exchange volatility : intraday evidence from the Moscow exchange

Using transaction-level tick-by-tick data of same- and next-day settlement of the Russian Ruble versus the US Dollar exchange rate (RUB/USD) traded on the Moscow Exchange Market during the period 2005-2013, we analyze the impact of trading hours extensions on volatility. During the sample period, the Moscow Exchange extended trading hours three times for the same-day settlement and two times for the next-day settlement of the RUB/USD rate. To analyze the effect of the implementations, various measures of historical and realized volatility are calculated for 5- and 15-min intraday intervals spanning a period of three months both prior to and following trading hours extensions. Besides historical volatility measures, we also examine volume and spread. We apply an autoregressive moving average-autoregressive conditional heteroscedasticity (ARMA-GARCH) model utilizing realized volatility and a trade classification rule to estimate the probability of informed trading. The extensions of trading hours cause a significant increase in both volatility and volume for further analyzing the reasons behind volatility changes. Volatility changes mostly occur after the opening of the market. The length of the extension has a significant positive effect on realized volatility. The results indicate that informed trading increased substantially after the opening for the rate of same-day settlement, whereas this is not observed for next-day settlement. Although trading hours extensions raise opportunities for more transactions and liquidity in foreign exchange markets, they may also lead to higher volatility in the market. Furthermore, this distortion is more significant at opening and midday. A potential explanation for the increased volatility mostly at the opening is that the trading hours extension attracts informed traders rather than liquidity providers.