{"title":"Global Liquidity Risk in the Foreign Exchange Market","authors":"C. Banti, Kate Phylaktis, Lucio Sarno","doi":"10.2139/ssrn.1954749","DOIUrl":null,"url":null,"abstract":"Using a broad data set of 20 US dollar exchange rates and order flow of institutional investors over 14 years, we construct a measure of global liquidity risk in the foreign exchange (FX) market. Our FX liquidity measure may be seen as the analog of the well-known Pastor–Stambaugh liquidity measure for the US stock market. We show that this measure has reasonable properties, and that there is a strong common component in liquidity across currencies. Finally, we provide evidence that liquidity risk is priced in the cross-section of currency returns, and estimate the liquidity risk premium in the FX market around 4.7 percent per annum.","PeriodicalId":11800,"journal":{"name":"ERN: Stock Market Risk (Topic)","volume":"50 1","pages":""},"PeriodicalIF":0.0000,"publicationDate":"2011-10-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"87","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"ERN: Stock Market Risk (Topic)","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.2139/ssrn.1954749","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 87
Abstract
Using a broad data set of 20 US dollar exchange rates and order flow of institutional investors over 14 years, we construct a measure of global liquidity risk in the foreign exchange (FX) market. Our FX liquidity measure may be seen as the analog of the well-known Pastor–Stambaugh liquidity measure for the US stock market. We show that this measure has reasonable properties, and that there is a strong common component in liquidity across currencies. Finally, we provide evidence that liquidity risk is priced in the cross-section of currency returns, and estimate the liquidity risk premium in the FX market around 4.7 percent per annum.
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