We study the liquidity of the global currency market by analyzing the price impact of trading volume. We analyze a decade of CLS intraday data representative of global foreign exchange (FX) trading by developing a refinement of the popular Amihud (2002) illiquidity measure that we call realized Amihud, which is the ratio between realized volatility and trading volume. Inversely related to market depth, price impact increases with transaction costs, money market stress, uncertainty, and risk aversion. Furthermore, we analyze whether and how liquidity begets price efficiency by looking at violations of the “triangular” no-arbitrage condition. We find that dollar-based currencies offer a lower trading impact supporting price efficiency.

Liquidity in the global currency market / Ranaldo, Angelo; Santucci de Magistris, Paolo. - In: JOURNAL OF FINANCIAL ECONOMICS. - ISSN 0304-405X. - 146:3(2022), pp. 859-883. [10.1016/j.jfineco.2022.09.004]

Liquidity in the global currency market

Paolo Santucci de Magistris
2022

Abstract

We study the liquidity of the global currency market by analyzing the price impact of trading volume. We analyze a decade of CLS intraday data representative of global foreign exchange (FX) trading by developing a refinement of the popular Amihud (2002) illiquidity measure that we call realized Amihud, which is the ratio between realized volatility and trading volume. Inversely related to market depth, price impact increases with transaction costs, money market stress, uncertainty, and risk aversion. Furthermore, we analyze whether and how liquidity begets price efficiency by looking at violations of the “triangular” no-arbitrage condition. We find that dollar-based currencies offer a lower trading impact supporting price efficiency.
Currency market, Foreign exchange, Global liquidity, Price impact, Arbitrage
Liquidity in the global currency market / Ranaldo, Angelo; Santucci de Magistris, Paolo. - In: JOURNAL OF FINANCIAL ECONOMICS. - ISSN 0304-405X. - 146:3(2022), pp. 859-883. [10.1016/j.jfineco.2022.09.004]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11385/221438
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