FX spot and swap market liquidity spillovers

Ingomar Krohn and Vladyslav Sushko

Journal of International Money and Finance, 2022, vol. 120, issue C

Abstract: We study the joint evolution of foreign exchange (FX) spot and swap market liquidity. We find strong co-movement in spot and swap market liquidity conditions and a robust link between FX funding and market liquidity, as gleaned from the pricing of both instruments. This link has strengthened over time. Dealing desks of globally systemically important banks periodically pull back from pricing FX swaps, particularly those that operate closer to regulatory capital or liquidity minimums. While wider spreads attract smaller dealers, liquidity in FX swaps remains impaired, which leads to 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)
Date: 2022
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Citations: View citations in EconPapers (8)

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Working Paper: FX spot and swap market liquidity spillovers (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:120:y:2022:i:c:s0261560621001273

DOI: 10.1016/j.jimonfin.2021.102476

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