IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp0944.html

Liquidity in the Foreign Exchange Market: Measurement, Commonality,and Risk Premiums

Author

Listed:
  • Loriano MANCINI

    (EPFL and Swiss Finance Institute)

  • Angelo RANALDO

    (Swiss National Bank Research Unit)

  • Jan WRAMPELMEYER

    (University of Zurich and Swiss Finance Institute)

Abstract

This paper develops a liquidity measure tailored to the foreign exchange (FX) market, quanti fies the amount of commonality in liquidity across different exchange rates, and determines the extent of liquidity risk premiums embedded in FX returns. The new liquidity measure utilizes ultra high frequency data and captures cross-sectional and temporal variation in FX liquidity during the financial crisis of 2007-2008. As sudden shocks to market-wide liquidity have important implications for regulators and investors, liquidity is decomposed into an idiosyncratic and a common component. Empirical results show that liquidity co-moves strongly across currency pairs and that systematic FX liquidity decreases dramatically during the financial crisis. To investigate whether investors require a return premium for bearing liquidity risk, a factor model for FX returns is extended by a novel liquidity risk factor constructed from shocks to market-wide liquidity. Estimation results suggest that liquidity risk is a heavily priced state variable.

Suggested Citation

  • Loriano MANCINI & Angelo RANALDO & Jan WRAMPELMEYER, 2009. "Liquidity in the Foreign Exchange Market: Measurement, Commonality,and Risk Premiums," Swiss Finance Institute Research Paper Series 09-44, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0944
    as

    Download full text from publisher

    File URL: http://ssrn.com/abstract=1520387
    Download Restriction: no
    File URL:
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp0944. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.