Day-of-the-Month Effects in the Performance of Momentum Trading Strategies in the Foreign Exchange Market

In this paper, we document a very strong day-of-the-month effect in the performance of momentum strategies in the foreign exchange market. We show that this seasonality in trading strategy performance is attributable to seasonality in the conditional volatility of foreign exchange returns, and in the volatility of conditional volatility. Indeed a two-factor model employing conditional volatility and the volatility of conditional volatility explains as much as 70 percent of the intra-month variation in the Sharpe ratio. We further show that the seasonality in volatility is in turn closely linked to the pattern of US macroeconomic news announcements, which tend to be clustered around certain days of the month