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Global liquidity risk in the foreign exchange market

Banti, C., Phylaktis, K. and Sarno, L. (2012). Global liquidity risk in the foreign exchange market. Journal of International Money and Finance, 31(2), pp. 267-291. doi: 10.1016/j.jimonfin.2011.11.010


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.

Publication Type: Article
Additional Information: © 2012, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International
Publisher Keywords: Foreign exchange; Liquidity; Order flow; Microstructure
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
Date available in CRO: 15 Jan 2016 09:38
Date deposited: 12 September 2016
Date of first online publication: March 2012
Text - Accepted Version
Available under License : See the attached licence file.

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