Template-type: ReDIF-Paper 1.0
Author-Name: Loriano Mancini
Author-Name-First: Loriano
Author-Name-Last: Mancini
Author-Name: Angelo Ranaldo
Author-Name-First: Angelo
Author-Name-Last: Ranaldo
Author-Person: pra161
Author-Name: Jan Wrampelmeyer
Author-Name-First: Jan
Author-Name-Last: Wrampelmeyer
Author-Person: pwr30
Title: Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums
Abstract: This paper develops a liquidity measure tailored to the foreign exchange (FX) market, quantifies the amount of commonality in liquidity across exchange rates, and determines the extent of liquidity risk premiums embedded in FX returns. The new liquidity measure utilizes ultra high frequency data and captures cross-sectional and temporal variation in FX liquidity during the financial crisis of 2007-2008. Empirical results show that liquidity co-moves across currency pairs and that systematic FX liquidity decreases dramatically during the crisis. Extending an asset pricing model for FX returns by the novel liquidity risk factor suggests that liquidity risk is heavily priced.
Length: 65 pages
Creation-Date: 2010
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2010/working_paper_2010_03
File-Format: text/html
Number: 2010-03
Classification-JEL: F31, G01, G12, G15
Keywords: foreign exchange market, measuring liquidity, commonality in liquidity, liquidity risk premium, subprime crisis
Handle: RePEc:snb:snbwpa:2010-03