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Understanding FX Liquidity

Karnaukh, Nina ; Ranaldo, Angelo ; Söderlind, Paul

In: The Review of Financial Studies, 2015, vol. 28, no. 11, p. 3073-3108

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    Titre
    • Understanding FX Liquidity
    Auteur
    • Karnaukh, Nina. University of St. Gallen
    • Ranaldo, Angelo. University of St. Gallen
    • Söderlind, Paul. University of St. Gallen
    Type de document
    • Postprint
    Langue
    • Anglais
    Publié dans
    • The Review of Financial Studies, 2015, vol. 28, no. 11, p. 3073-3108. Oxford University Press
    Autre version électronique
    Identifiant OAI-PMH
    • oai:doc.rero.ch:303994
    Summary
    We provide a comprehensive study of the liquidity of spot foreign exchange (FX) rates over more than two decades and a large cross-section of currencies. First, we show that FX liquidity can be accurately measured with daily and readily available data. Second, we demonstrate that FX liquidity declines with funding constraints and global risk, supporting theoretical models relating funding and market liquidity. In these distressed circumstances, liquidity tends to evaporate more for developed and riskier currencies. Finally, we show stronger comovements of FX liquidities in distressed markets, especially when funding is constrained, volatility is high, and FX speculators incur losses