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Illiquidity in the stock and foreign exchange markets: an investigation of their cross-market dynamics

Banti, Chiara (2016) 'Illiquidity in the stock and foreign exchange markets: an investigation of their cross-market dynamics.' Journal of Financial Research, 39 (4). 411 - 436. ISSN 0270-2592

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Abstract

In this article, I investigate the illiquidity channel linking stocks and currencies and provide evidence of important illiquidity dynamics, especially during crisis episodes. I show that the stocks of small firms more exposed to funding constraints also exhibit greater linkages with foreign exchange illiquidity. Furthermore, the currencies that are common targets of carry trades are more intertwined with stock illiquidity. Regarding potential determinants, the liquidity demand by institutional investors and liquidity provision by dealers are potential triggers of systemic illiquidity spirals. These dynamics are not exclusive to the recent financial crisis but were also present during the dot‐com bubble crisis.

Item Type: Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Jim Jamieson
Date Deposited: 07 Dec 2016 16:36
Last Modified: 03 Dec 2018 02:00
URI: http://repository.essex.ac.uk/id/eprint/18395

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