Understanding FX Liquidity

Nina Karnaukh, Angelo Ranaldo and Paul Söderlind

No 1315, Working Papers on Finance from University of St. Gallen, School of Finance

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.

Keywords: exchange rates; liquidity; transaction costs; commonality; low-frequency data (search for similar items in EconPapers)
JEL-codes: C15 F31 G12 G15 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2013-09, Revised 2015-04
New Economics Papers: this item is included in nep-cba, nep-mon and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (98)

Forthcoming in The Review of Financial Studies

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Journal Article: Understanding FX Liquidity (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2013:15

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