Understanding FX Liquidity

Item Type Journal paper
Abstract

We provide a comprehensive study of the liquidity of spot foreign exchange (FX) rates over more than two decades and a large cross-section of currencies. First, we show that FX liquidity can be accurately measured with daily and readily available data. Second, we demonstrate that FX liquidity declines with funding constraints and global risk, supporting theoretical models relating funding and market liquidity. In these distressed circumstances, liquidity tends to evaporate more for developed and riskier currencies. Finally, we show stronger comovements of FX liquidities in distressed markets, especially when funding is constrained, volatility is high, and FX speculators incur losses.

Authors Karnaukh, Nina; Ranaldo, Angelo & Söderlind, Paul
Journal or Publication Title Review of Financial Studies
Language English
Keywords exchange rates, liquidity, transaction costs, commonality, low-frequency
Subjects business studies
HSG Classification contribution to scientific community
Refereed Yes
Date November 2015
Publisher Oxford University Press
Place of Publication Cary, NC
Volume 28
Number 11
Page Range 3073-3108
ISSN 0893-9454
ISSN-Digital 1465-7368
Publisher DOI 10.1093/rfs/hhv029
Depositing User Prof. Dr. Angelo Ranaldo
Date Deposited 22 Apr 2015 09:59
Last Modified 25 Sep 2021 00:22
URI: https://www.alexandria.unisg.ch/publications/240626

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Citation

Karnaukh, Nina; Ranaldo, Angelo & Söderlind, Paul (2015) Understanding FX Liquidity. Review of Financial Studies, 28 (11). 3073-3108. ISSN 0893-9454

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https://www.alexandria.unisg.ch/id/eprint/240626
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