Abstract:  This study aims to examine the effect of trading hours extension on foreign exchange rate volatility. The transaction-level tick-by-tick data of same-day and next-day settlement of the RUB/USD currency pair traded on the Moscow Exchange Market during the period 2005-2013 are utilised for the analyses. Various measures of historical and realised volatility are calculated for 5-minute and 15-minute intraday intervals spanning a period of 3 months both prior to and following trading hours extensions. Besides historical volatility measures, volume and spread are also examined. The ARMA-GARCH model applied to realised volatility and a trade classification rule applied to data to calculate the probability of informed trading. Trading hours extensions cause a significant increase in historical/realised volatility and volume of RUB/USD. We also documented that the length of the extension has a significant positive effect on realised volatility. The result show that informed trading volume shifted from closing to opening time due to more overlapping trading hours of Russian market with EU and US markets.  

Co-Author: Prof. Michael Frommel