Changes in FX Liquidity: Roles of Funding Constraints and Global Risks

Phuvadon Wuthisatian

doi:10.33642/ijbass.v6n5p3

Changes in FX Liquidity: Roles of Funding Constraints and Global Risks

Phuvadon Wuthisatian^*

^*Corresponding author for this work

Hastings College

Research output: Contribution to journal › Article › peer-review

Abstract

This paper investigates the measure of FX liquidity and determinants of the change in FX liquidity. Using 20 cross currency exchange rates over the spanning period of 1999 to 2016, we find that funding constraints and global risks are responsible for the change in FX liquidity. The magnitudes of both G7 and emerging volatility index are offsetting each other in all the regression models indicating that FX investors take diversification trading strategies to diversify their portfolios. The financial crisis provides evidence that the more financial constraint issues contribute to the change in FX market liquidity more than non-financial crisis period. Extending to return predictability, we find that the average variance contributes the most for currency predictability more than other explanatory variables.

Original language	American English
Pages (from-to)	22-44
Number of pages	23
Journal	International Journal of Business and Applied Social Science
Volume	6
Issue number	5
DOIs	https://doi.org/10.33642/ijbass.v6n5p3
State	Published - May 2020
Externally published	Yes

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abstract = "This paper investigates the measure of FX liquidity and determinants of the change in FX liquidity. Using 20 cross currency exchange rates over the spanning period of 1999 to 2016, we find that funding constraints and global risks are responsible for the change in FX liquidity. The magnitudes of both G7 and emerging volatility index are offsetting each other in all the regression models indicating that FX investors take diversification trading strategies to diversify their portfolios. The financial crisis provides evidence that the more financial constraint issues contribute to the change in FX market liquidity more than non-financial crisis period. Extending to return predictability, we find that the average variance contributes the most for currency predictability more than other explanatory variables.",

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AB - This paper investigates the measure of FX liquidity and determinants of the change in FX liquidity. Using 20 cross currency exchange rates over the spanning period of 1999 to 2016, we find that funding constraints and global risks are responsible for the change in FX liquidity. The magnitudes of both G7 and emerging volatility index are offsetting each other in all the regression models indicating that FX investors take diversification trading strategies to diversify their portfolios. The financial crisis provides evidence that the more financial constraint issues contribute to the change in FX market liquidity more than non-financial crisis period. Extending to return predictability, we find that the average variance contributes the most for currency predictability more than other explanatory variables.

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Changes in FX Liquidity: Roles of Funding Constraints and Global Risks

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