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research article
Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums
2013
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.
Type
research article
Web of Science ID
WOS:000324100400007
Authors
Publication date
2013
Publisher
Published in
Volume
68
Issue
5
Start page
1805
End page
1841
Peer reviewed
REVIEWED
EPFL units
Available on Infoscience
November 4, 2013
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