FX spot and swap market liquidity spillovers

Ingomar Krohn and Vladyslav Sushko

No 836, BIS Working Papers from Bank for International Settlements

Abstract: We study the joint evolution of foreign exchange (FX) spot and swap market liquidity. Trading in FX swaps exceeds that of spot, yet this market segment has been largely ignored in prior research on liquidity in FX markets. We find strong co-movement in spot and swap market liquidity conditions and a strong link between FX funding and market liquidity, as gleaned from the pricing of both instruments. This link has strengthened over time with changes in dealer behaviour. Some of the largest dealers periodically pull back from pricing FX swaps and wider spreads attract smaller dealers. At the same time, liquidity in FX swaps remains impaired, which leads to adverse illiquidity spillovers to the spot market. Our findings suggest that funding liquidity has become a more important driver of spot market liquidity than it used to be.

Keywords: foreign exchange; market and funding liquidity; microstructure; dealer activity; window dressing (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2020-01
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: FX spot and swap market liquidity spillovers (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:836

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