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SDR adjustment and FX liquidity

Author

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  • Chen, Yu-Lun
  • Yang, J. Jimmy

Abstract

The inclusion of Chinese renminbi in the Special Drawing Rights (SDR) lowers weightings of the other SDR currencies (EUR, JPY, and GBP) in the basket. Conventional wisdom suggests no material impact on those currencies. However, we find that, after the SDR adjustment, the liquidity of down-weighted currencies declines significantly. The SDR adjustment increases the FX liquidity commonality and enhances the liquidity spillover and risk transmission from EUR, JPY, and GBP to other world currencies. We identify major determinants of FX liquidity and highlight important policy implications.

Suggested Citation

  • Chen, Yu-Lun & Yang, J. Jimmy, 2025. "SDR adjustment and FX liquidity," Pacific-Basin Finance Journal, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:pacfin:v:91:y:2025:i:c:s0927538x25000484
    DOI: 10.1016/j.pacfin.2025.102711
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    More about this item

    Keywords

    Special drawing rights (SDR); Liquidity spillover; Liquidity commonality;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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