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Understanding FX Liquidity

Listed author(s):
  • Karnaukh, Nina

    ()

  • Ranaldo, Angelo

    ()

  • Söderlind, Paul

    ()

We provide a comprehensive study of the liquidity of spot foreign exchange (FX) rates over more than two decades and a large cross-section of currencies. First, we show that FX liquidity can be accurately measured with daily and readily-available data. Second, we demonstrate that FX liquidity declines with funding constraints and global risk, supporting theoretical models relating funding and market liquidity. In these distressed circumstances, liquidity tends to evaporate more for developed and riskier currencies. Finally, we show stronger comovements of FX liquidities in distressed markets, especially when funding is constrained, volatility is high, and FX speculators incur losses.

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File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1315.pdf
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Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1315.

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Length: 48 pages
Date of creation: Sep 2013
Date of revision: Apr 2015
Publication status: Forthcoming in The Review of Financial Studies
Handle: RePEc:usg:sfwpfi:2013:15
Contact details of provider: Phone: +41 71 243 40 11
Fax: +41 71 243 40 40
Web page: http://www.unisg.ch/de/universitaet/schools/finance

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