Does liquidity in the FX market depend on volatility?

Frank Westerhoff and Sebastiano Manzan ()
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Sebastiano Manzan: University of Amsterdam, CeNDEF, Department of Quantitative Economics

Economics Bulletin, 2004, vol. 6, issue 10, 1-8

Abstract: We re-examine the relationship between exchange rates and order flow as proposed by Evans and Lyons (2002). Compared to their linear specification, we find that the response of exchange rates to order flow may depend on market historical volatility. If market historical volatility is high, a given order seems to have a lower price impact than in calmer periods. Overall, our simple threshold mechanism has the power to produce higher correlation coefficients.

Keywords: exchange; rate; dynamics (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
Date: 2004-08-25
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Citations: View citations in EconPapers (2)

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