Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums

Item Type Journal paper
Abstract

We provide the first systematic study of liquidity in the foreign exchange market.
We find significant variation in liquidity across exchange rates, substantial
illiquidity costs, and strong commonality in liquidity across currencies and with
equity and bond markets. We analyze the impact of liquidity risk on carry trades,
a popular trading strategy that borrows in low-yielding currencies and invests in
high-yielding currencies. Results show that funding (investment) currencies offer
insurance against (exposure to) liquidity risk. A liquidity risk factor has a strong
impact on carry trade returns from 2007 to 2009, suggesting that liquidity risk
is priced. We present evidence that liquidity spirals may trigger these findings.

Authors Mancini, Loriano; Ranaldo, Angelo & Wrampelmeyer, Jan
Journal or Publication Title Journal of Finance
Language English
Subjects business studies
Institute/School s/bf - Swiss Institute of Banking and Finance
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HSG Classification contribution to scientific community
Refereed Yes
Date October 2013
Publisher Wiley-Blackwell
Place of Publication Oxford
Volume 68
Number 5
Page Range 1805-1841
Number of Pages 37
ISSN 0022-1082
ISSN-Digital 1540-6261
Publisher DOI 10.1111/jofi.12053
Depositing User Prof. Dr. Angelo Ranaldo
Date Deposited 03 Jul 2012 11:18
Last Modified 12 Feb 2018 01:20
URI: https://www.alexandria.unisg.ch/publications/214648

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Citation

Mancini, Loriano; Ranaldo, Angelo & Wrampelmeyer, Jan (2013) Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums. Journal of Finance, 68 (5). 1805-1841. ISSN 0022-1082

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https://www.alexandria.unisg.ch/id/eprint/214648
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