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Understanding FX Liquidity

  • Karnaukh, Nina

    ()

  • Ranaldo, Angelo

    ()

  • Söderlind, Paul

    ()

We provide a comprehensive study of 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 data that are readily available. Second, we demonstrate that FX liquidity declines with funding constraints and volatility supporting the theoretical models relating funding and market liquidity. FX liquidity also deteriorates with volatility and illiquidity of stock and bond markets suggesting cross-market contagion effects. Finally, we show stronger comovements of FX liquidities in distressed markets and for wealthier countries with high-quality institutions.

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File URL: http://www1.vwa.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: 52 pages
Date of creation: Sep 2013
Date of revision: Nov 2014
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/Schools/Finance.aspx

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