Liquidity in the global currency market

Angelo Ranaldo and Paolo Santucci de Magistris

Journal of Financial Economics, 2022, vol. 146, issue 3, 859-883

Abstract: We study the liquidity of the global currency market by analyzing the price impact of trading volume. We analyze a decade of CLS intraday data representative of global foreign exchange (FX) trading by developing a refinement of the popular Amihud (2002) illiquidity measure that we call realized Amihud, which is the ratio between realized volatility and trading volume. Inversely related to market depth, price impact increases with transaction costs, money market stress, uncertainty, and risk aversion. Furthermore, we analyze whether and how liquidity begets price efficiency by looking at violations of the “triangular” no-arbitrage condition. We find that dollar-based currencies offer a lower trading impact supporting price efficiency.

Keywords: Currency market; Foreign exchange; Global liquidity; Price impact; Arbitrage (search for similar items in EconPapers)
JEL-codes: C15 F31 G12 G15 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:146:y:2022:i:3:p:859-883

DOI: 10.1016/j.jfineco.2022.09.004

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