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

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Author Info
Cho-Hoi Hui (Research Department, Hong Kong Monetary Authority)
Hans Genberg (Research Department, Hong Kong Monetary Authority)
Tsz-Kin Chung (Research Department, Hong Kong Monetary Authority)

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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.

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File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP09_11_full.pdf
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Publisher Info
Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0911.

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Length: 24 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:hkg:wpaper:0911

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Related research
Keywords: Sub-prime crisis; carry trades; liquidity; leverage;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008. "Carry Trades and Currency Crashes," NBER Working Papers 14473, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March. [Downloadable!] (restricted)
  3. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York. [Downloadable!]
  4. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March. [Downloadable!]
  5. James McAndrews & Asani Sarkar & Zhenyu Wang, 2008. "The effect of the Term Auction Facility on the London Inter-Bank Offered Rate," Staff Reports 335, Federal Reserve Bank of New York. [Downloadable!]
Full references

Statistics
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This page was last updated on 2009-11-5.

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