Understanding FX liquidity
Type
presentation
Date Issued
2013-12-17
Author(s)
Abstract
Previous studies of liquidity in the foreign exchange (FX) market span short time
periods or focus on specific measures of liquidity. In contrast, we provide a comprehensive study of FX liquidity and commonality over more than two decades and a cross-section of forty exchange rates. After identifying the most accurate liquidity proxies based on low-frequency and readily available data, we show that commonality in FX liquidities is stronger for developed currencies and in highly volatile
markets. We also show that FX liquidity deteriorates with risk in stock, bond and FX
markets, and that riskier currencies are more exposed to liquidity drops.
periods or focus on specific measures of liquidity. In contrast, we provide a comprehensive study of FX liquidity and commonality over more than two decades and a cross-section of forty exchange rates. After identifying the most accurate liquidity proxies based on low-frequency and readily available data, we show that commonality in FX liquidities is stronger for developed currencies and in highly volatile
markets. We also show that FX liquidity deteriorates with risk in stock, bond and FX
markets, and that riskier currencies are more exposed to liquidity drops.
Language
English
Keywords
exchange rates
liquidity
transaction costs
commonality
low-frequency
data
data
HSG Classification
contribution to scientific community
Refereed
No
Event Title
Third workshop on financial determinants of exchange rates
Event Location
I - Rome
Subject(s)
Eprints ID
228523