Illiquidity in the stock and FX markets: an investigation of their cross-market dynamics

Chiara Banti

Essex Finance Centre Working Papers from University of Essex, Essex Business School

Abstract: In this paper, I investigate the illiquidity channel linking the stock and FX markets.The evidence of co-movement and cross-market spillovers is supportive of important dynamics in illiquidity, especially during the recent crisis. To clarify the nature of these dynamics, I consider the role of two important players on both markets, institutional investors and dealers. Overall, correlated institutional trading contributes to liquidity across markets. Furthermore, as funding availability reduces in times of crisis, dealers' funding constraints affect the observed dynamics. Finally, both correlated institutional trading and dealers' funding constraints are potential triggers of systemic illiquidity spirals.

Keywords: HG (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:esy:uefcwp:15626

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