TY - JOUR
T1 - Liquidity in the foreign exchange market
T2 - Measurement, commonality, and risk premiums
AU - Mancini, Loriano
AU - Ranaldo, Angelo
AU - Wrampelmeyer, Jan
PY - 2013/10
Y1 - 2013/10
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=84880405168&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84880405168&partnerID=8YFLogxK
U2 - 10.1111/jofi.12053
DO - 10.1111/jofi.12053
M3 - Article
AN - SCOPUS:84880405168
SN - 0022-1082
VL - 68
SP - 1805
EP - 1841
JO - The Journal of Finance
JF - The Journal of Finance
IS - 5
ER -
