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Trading Volume, Illiquidity and Commonalities in FX Markets
Type
conference paper
Date Issued
2020-01-05
Author(s)
Santucci de Magistris, Paolo
Abstract
In a regime of floating FX rates and open economies, it is important to understand the way through which FX rates, volatility, and trading volume interrelate. To uncover this, we provide a simple theoretical framework to jointly explore these factors in a multi-currency
environment. Through the use of a unique intraday data representative for the global FX market, the empirical analysis validates our theoretical predictions: (i) more disagreement
increases FX trading volume, volatility, and illiquidity, (ii) stronger commonalities pertain to more efficient (arbitrage-free) currencies, and (iii) the Amihud (2002) measure, for which we provide a theoretical underpinning, is effective in measuring FX illiquidity. Not only do these findings support an integrated analysis of FX rate evolution and risk, but our work also offers a straightforward method to measure FX illiquidity and commonality.
For investors, these insights should increase the efficiency of trading and risk analysis. For policy makers, our work highlights the developments of FX global volume, volatility, and illiquidity across time and currencies, which can be important for the implementation of
monetary policy and financial stability.
environment. Through the use of a unique intraday data representative for the global FX market, the empirical analysis validates our theoretical predictions: (i) more disagreement
increases FX trading volume, volatility, and illiquidity, (ii) stronger commonalities pertain to more efficient (arbitrage-free) currencies, and (iii) the Amihud (2002) measure, for which we provide a theoretical underpinning, is effective in measuring FX illiquidity. Not only do these findings support an integrated analysis of FX rate evolution and risk, but our work also offers a straightforward method to measure FX illiquidity and commonality.
For investors, these insights should increase the efficiency of trading and risk analysis. For policy makers, our work highlights the developments of FX global volume, volatility, and illiquidity across time and currencies, which can be important for the implementation of
monetary policy and financial stability.
Language
English
Keywords
FX Trading Volume
Volatility
Illiquidity
Commonalities
Arbitrage
HSG Classification
contribution to scientific community
HSG Profile Area
SOF - System-wide Risk in the Financial System
Event Title
ASSA 2020 Annual Meeting
Event Location
San Diego, California
Event Date
3. - 5. Januar 2020
Subject(s)
Division(s)
Eprints ID
258955