Liquidity Problems in the FX Liquid Market
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 HAL in its series Working Papers with number halshs-00539985.
Date of creation: 2010
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FX market; Liquidity; financial crisis;
Other versions of this item:
- Le Fol, Gaëlle & Idier, Julien & Borgy, Vladimir, 2010. "Liquidity Problems in the FX Liquid Market," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/5574, Paris Dauphine University.
- G01 - Financial Economics - - General - - - Financial Crises
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- F31 - International Economics - - International Finance - - - Foreign Exchange
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- Serge Darolles & Gaëlle Le Fol & Gulten Mero, 2010. "When Market Illiquidity Generates Volumes," Working Papers, HAL halshs-00536046, HAL.
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