Understanding FX Liquidity
Journal
Review of Financial Studies
ISSN
0893-9454
ISSN-Digital
1465-7368
Type
journal article
Date Issued
2015-11
Author(s)
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.
Language
English
Keywords
exchange rates
liquidity
transaction costs
commonality
low-frequency
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Oxford University Press
Publisher place
Cary, NC
Volume
28
Number
11
Start page
3073
End page
3108
Subject(s)
Eprints ID
240626