Open AccessChanges in FX liquidity: Roles of Funding Constraints and Global Risks
Author(s) -
Phuvadon Wuthisatian
Publication year - 2020
Publication title -
international journal of business and applied social science
Language(s) - English
Resource type - Journals
ISSN - 2469-6501
DOI - 10.33642/ijbass.v6n5p3
Subject(s) - market liquidity , diversification (marketing strategy) , financial crisis , predictability , currency , funding liquidity , liquidity crisis , volatility (finance) , economics , monetary economics , liquidity risk , constraint (computer aided design) , index (typography) , business , financial economics , macroeconomics , mechanical engineering , physics , marketing , quantum mechanics , world wide web , computer science , engineering
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.