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Foreign Exchange Swap Liquidity

Peteris Kloks, Edouard Mattille and Angelo Ranaldo
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Peteris Kloks: University of St. Gallen
Edouard Mattille: University of St. Gallen

No 23-22, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper presents the first comprehensive examination of liquidity in the global foreign exchange (FX) swap market. Our analysis employs effective measures that assess both the tightness and depth of the global market. We identify three main findings: First, FX swap liquidity is fragmented across currencies, tenors, and time. Second, liquidity conditions worsen when dealers’ balance sheet capacity shrinks, especially at quarter-end reporting dates. However, we observe a simultaneous surge in short-term volumes; we rationalize this through a difference-in-differences analysis suggesting a demand channel for FX swaps during reporting windows. Third, we build a measure of pricing efficiency based on the law of one price and show that illiquidity impairs efficiency even during periods when dealers’ regulatory constraints are slack.

Keywords: exchange swap; Global currency market; Market liquidity; Dealers; Price efficiency. (search for similar items in EconPapers)
JEL-codes: C15 F31 G12 G15 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2023-03
New Economics Papers: this item is included in nep-ifn, nep-mac, nep-mon and nep-mst
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