A span of continuous trades and liquidity dynamics in foreign exchange markets

Chih‐Chung Chien, Shikuan Chen and Ming‐Jen Chang

International Journal of Finance & Economics, 2023, vol. 28, issue 1, 144-168

Abstract: This study incorporates the spans of sequences of continuous trades and reversal trades to investigate whether the currency liquidity is varying with the span of continuous trades or reversal trades. We highlight the dependency between the span of continuous trades and the realized bid‐ask spread to explain the currency liquidity dynamics using high‐frequency foreign exchange data. Our findings show that the spans of continuous trades play an important role in determining the market liquidity because a larger span of a continuous sequence puts a drain on the market liquidity and thereby consumes the funding liquidity, eventually increasing the bid‐ask spread.

Date: 2023
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https://doi.org/10.1002/ijfe.2410

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Persistent link: https://EconPapers.repec.org/RePEc:wly:ijfiec:v:28:y:2023:i:1:p:144-168

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