Constrained liquidity provision in currency markets

• 成果类型: Article
• 署名作者: Huang, Wenqian; Ranaldo, Angelo; Schrimpf, Andreas; Somogyi, Fabricius
• 署名单位: Bank for International Settlements (BIS); University of Basel; Centre for Economic Policy Research - UK; Northeastern University
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2025.104028
• 发表日期: 2025
• 关键词: Currency markets; dealer constraints; market liquidity; FX; liquidity provision

摘要

We devise a simple model of liquidity demand and supply to study dealers' liquidity provision in currency markets. Drawing on a globally representative data set of currency trading volumes, we show that at times when dealers' intermediation capacity is constrained the cost of liquidity provision increases disproportionately relative to dealer-intermediated volume. Consequently, the otherwise strong and positive relation between liquidity costs and trading volume diminishes significantly when dealers face tighter Value-at-Risk limits or higher funding costs. Using various econometric approaches, we show that this nonlinear effect of dealer constraints on market liquidity primarily stems from a reduction in the elasticity of liquidity supply, rather than changes in liquidity demand.