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Development and functioning of FX markets in Asia and the Pacific

In: Cross-border Financial Linkages: Challenges for Monetary Policy and Financial Stability

Author

Listed:
  • Richard M Levich

    (Stern School of Business)

  • Frank Packer

    (Bank for International Settlements)

Abstract

Global foreign exchange (FX) trading volume in traditional FX products and derivatives in Asia and the Pacific has expanded rapidly over the last fifteen years, more so than in other regions. Asian currencies also have experienced exceptional growth in offshore turnover, including non‐deliverable forwards (NDFs). Trading activity on this scale spread across many countries and currencies underscores the need for a well‐functioning infrastructure and exceptional risk management processes. While settlement risks are mitigated for the vast majority of turnover through systems like CLS Bank, the Asia Pacific region would benefit by having more countries and currencies become CLS enabled or tradable under other Payment versus payment (PVP) systems. Though less pronounced than during the global financial crisis, FX markets in the region experienced added turbulence during the “taper tantrum” period of 2013. High turnover currencies tended to depreciate more after taper announcements; though volatility rose more sharply in currencies with low turnover. The FX market is a prominent venue for carry trades that are subject to crash risk. While there is some evidence of herding behavior exacerbating this risk over the past decade, the measures calibrated more recently do not suggest exceptional crowding into carry trades ahead of the “taper tantrum” in 2013. At the same time, our measures of crowdedness for the carry trade show considerable variation over time. Making crowdedness measures publicly available might be advisable.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Richard M Levich & Frank Packer, 2015. "Development and functioning of FX markets in Asia and the Pacific," BIS Papers chapters, in: Bank for International Settlements (ed.), Cross-border Financial Linkages: Challenges for Monetary Policy and Financial Stability, volume 82, pages 75-132, Bank for International Settlements.
    • Handle: RePEc:bis:bisbpc:82-07
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    Cited by:

    1. Joel Hasbrouck & Richard M. Levich, 2017. "FX Market Metrics: New Findings Based on CLS Bank Settlement Data," NBER Working Papers 23206, National Bureau of Economic Research, Inc.

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