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Liquidity, Risk Appetite and Exchange Rate Movements During the Financial Crisis of 2007-2009

Cho-Hoi Hui, Hans Genberg and Tsz-Kin Chung
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Cho-Hoi Hui: Research Department, Hong Kong Monetary Authority
Tsz-Kin Chung: Research Department, Hong Kong Monetary Authority

No 911, Working Papers from Hong Kong Monetary Authority

Abstract: Given the deleveraging process in the banking sector, banks were reluctant to lend funds in the interbank market because of uncertainty about their own future need for funds during the financial crisis of 2007 - 2009. Aggregate liquidity then declined. This paper investigates the impact of the market-wide liquidity risk and carry-trade incentives on exchange rate movements. The results suggest that liquidity risk measured by the spread between LIBOR and the overnight index swap rate was a significant factor affecting the exchange-rate movements of the euro, British pound and Swiss franc, while carry trades were important for the Japanese yen, Australian dollar and New Zealand dollar.

Keywords: Sub-prime crisis; carry trades; liquidity; leverage (search for similar items in EconPapers)
JEL-codes: F31 F32 F33 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2009-06
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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