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Contribution Details
| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums |
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| Series Name | Swiss National Bank |
| Number | 3 |
| Date | 2010 |
| Abstract Text | We use intraday trading and order data to measure liquidity in the foreign exchange (FX) market. FX liquidity exhibits significant cross-sectional and temporal variation during our sample period January 2007--December 2009. We decompose liquidity into an idiosyncratic and a common component. Empirical results show that liquidity comoves strongly across currencies and that systematic FX liquidity decreases dramatically during the financial crisis. Consistent with a theory of liquidity spirals, we document that FX market liquidity is related to funding liquidity and liquidity of equity markets. Finally, we introduce a tradable FX liquidity risk factor, which is shown to account for most of the variation in daily carry trade returns. |
| Official URL | http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1447869 |
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| Additional Information | Awarded as "Outstanding Paper in International Finance" at the Eastern Finance Association meeting, Las Vegas, 2010. Revised and resubmitted to Journal in 2011 |