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

• 成果类型: Article
• 署名作者: Mancini, Loriano; Ranaldo, Angelo; Wrampelmeyer, Jan
• 署名单位: Swiss Federal Institutes of Technology Domain; Ecole Polytechnique Federale de Lausanne; Swiss Finance Institute (SFI); University of St Gallen
• 刊物名称: JOURNAL OF FINANCE
• ISSN/ISSBN: 0022-1082
• DOI: 10.1111/jofi.12053
• 发表日期: 2013
• 页码: 1805-1841
• 关键词: cross-section; Order Flow; returns; STOCK; illiquidity; prices; volume

摘要

We provide the first systematic study of liquidity in the foreign exchange market. We find significant variation in liquidity across exchange rates, substantial illiquidity costs, and strong commonality in liquidity across currencies and with equity and bond markets. Analyzing the impact of liquidity risk on carry trades, we show that funding (investment) currencies offer insurance against (exposure to) liquidity risk. A liquidity risk factor has a strong impact on carry trade returns from 2007 to 2009, suggesting that liquidity risk is priced. We present evidence that liquidity spirals may trigger these findings.