Preferred Habitat, Window Dressing, or Both? Evidence From Foreign Exchange Swaps in Taiwan

Abstract

In this paper, we use a unique dataset to examine the cause of return irregularity in financial markets around the end of the year. Year-end return irregularities are often attributed to either window-dressing or preferred habitat. We study year-end return irregularities in the foreign exchange swap market. We find that the return of a contract ending before the end of the year is lower than the return of a contract ending after the beginning of the year. The results support the existence of the preferred habitat and provide some evidence of window dressing in foreign exchange swaps.