EconPapers    
Economics at your fingertips  
 

Market liquidity risks of foreign exchange derivatives and cross-country equity portfolio allocations

Chandra Thapa, Suman Neupane () and Andrew Marshall

Journal of Multinational Financial Management, 2016, vol. 34, issue C, 46-64

Abstract: Foreign exchange derivatives (FXD) are important tools for hedging foreign exchange (FX) risks and enhancing returns of international portfolios. However, the ability to use FXD can be constrained by higher trading costs and the liquidity risks of the FXD available in different markets/currencies across countries. In this study, we investigate whether the wide cross-sectional and temporal variations observed in the liquidity level of FXD markets are associated with the cross-country allocation decisions of foreign portfolio investors. Using an extensive dataset of 40 countries and a number of alternative specifications, our study finds that investors tend to allocate more wealth in countries that provide liquid and cost-effective opportunities for using FXD. Our results suggest that regulatory reforms aimed at developing FXD markets could be a potential policy measure for attracting higher levels of foreign equity portfolio investments.

Keywords: Foreign equity portfolio allocations; Foreign exchange derivatives; Market liquidity risks (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1042444X16300019
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:34:y:2016:i:c:p:46-64

DOI: 10.1016/j.mulfin.2016.01.001

Access Statistics for this article

Journal of Multinational Financial Management is currently edited by I. Mathur and G. G. Booth

More articles in Journal of Multinational Financial Management from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2022-11-24
Handle: RePEc:eee:mulfin:v:34:y:2016:i:c:p:46-64