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Global liquidity risk in the foreign exchange market

Banti, C and Phylaktis, K and Sarno, L (2012) 'Global liquidity risk in the foreign exchange market.' Journal of International Money and Finance, 31 (2). 267 - 291. ISSN 0261-5606

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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. © 2011 Elsevier Ltd.

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: Jo Wiltshire
Date Deposited: 29 Aug 2013 15:56
Last Modified: 05 Feb 2019 18:15
URI: http://repository.essex.ac.uk/id/eprint/5959

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