Liquidity Problems in the FX Liquid Market: Ask for the BIL" "

Vladimir Borgy, Julien Idier and Gaelle Le Fol

No 2010-16, Working Papers from Center for Research in Economics and Statistics

Abstract: Even though the FX market is one of the most liquid financial markets, it would be an errorto consider it immune to liquidity problems. This paper analyzes on a long sample (2000-2009), all sets ofquotes and transactions in three main currency pairs (EURJPY, EURUSD, USDJPY) on the EBS platform. Tocharacterize FX market liquidity, we consider the spread, the traded volume, the number of transactions andthe Amihud (2002) statistic for illiquidity. We also propose the computation of a new liquidity indicator, BIL,that solely relies on price series availability. The main benefit of such a measure is that it can be easily calculatedon almost any financial market as well as allowing for a clear interpretation in terms of liquidity costs. Using allthese advanced liquidity analyses, we finally test the accuracy of these measures to detect liquidity problems inthe FX market. Our analysis, based on a signaling approach, shows that liquidity problems have arisen duringspecific episodes in the early 2000s and more generally during the recent financial turmoil.

Pages: 39
Date: 2010
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Citations: View citations in EconPapers (2)

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