Liquidity problems in the FX liquid market: Ask for the "BIL"
AbstractEven though the FX market is one of the most liquid financial market, it would be an error to consider that it is immune against any liquidity problem. This paper analyzes on a long sample (2000-2009), the all set of quotes and transactions in three main currency pairs (EURJPY, EURUSD, USDJPY) on the EBS platform. To characterize the FX market liquidity, we consider the spread, the traded volume, the number of transactions and the 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 measure is to be easily calculated on almost any financial market as well as to have a clear interpretation in terms of liquidity costs. Using all these advanced liquidity analyses, we finally test the accuracy of these measures to detect liquidity problems in the FX market. Our analysis, based on a signaling approach, shows that liquidity problems have arisen during specific episodes in the early 2000's and more generally during the recent financial turmoil.
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Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 279.
Length: 44 pages
Date of creation: 2010
Date of revision:
FX market; Liquidity; financial crisis.;
Other versions of this item:
- Vladimir Borgy & Julien Idier & Gaëlle Le Fol, 2010. "Liquidity Problems in the FX Liquid Market : Ask for the BIL" "," Working Papers 2010-16, Centre de Recherche en Economie et Statistique.
- G01 - Financial Economics - - General - - - Financial Crises
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-08 (All new papers)
- NEP-IFN-2010-05-08 (International Finance)
- NEP-MST-2010-05-08 (Market Microstructure)
- NEP-RMG-2010-05-08 (Risk Management)
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