SDR adjustment and FX liquidity

Yu-Lun Chen and J. Jimmy Yang

Pacific-Basin Finance Journal, 2025, vol. 91, issue C

Abstract: The inclusion of Chinese renminbi in the Special Drawing Rights (SDR) lowers weightings of the other SDR currencies (EUR, JPY, and GBP) in the basket. Conventional wisdom suggests no material impact on those currencies. However, we find that, after the SDR adjustment, the liquidity of down-weighted currencies declines significantly. The SDR adjustment increases the FX liquidity commonality and enhances the liquidity spillover and risk transmission from EUR, JPY, and GBP to other world currencies. We identify major determinants of FX liquidity and highlight important policy implications.

Keywords: Special drawing rights (SDR); Liquidity spillover; Liquidity commonality (search for similar items in EconPapers)
JEL-codes: F31 F62 G15 G18 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:91:y:2025:i:c:s0927538x25000484

DOI: 10.1016/j.pacfin.2025.102711

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