Trading Volume, Illiquidity and Commonalities in FX Markets

47 Pages Posted: 22 Nov 2018 Last revised: 26 Nov 2018

See all articles by Angelo Ranaldo

Angelo Ranaldo

University of St. Gallen; University of St. Gallen - School of Finance

Paolo Santucci de Magistris

Aarhus University - CREATES

Abstract

We provide a unified model for foreign exchange (FX), trading volume, and volatility
in a multi-currency environment. Tied by arbitrage conditions, FX rates are determined
by common information and trader-specific components generating heterogeneous
reservation prices thus inducing trading. Our model outlines new properties including
volume-volatility relationships between direct and synthetic FX rates. It also provides
a theoretical foundation for commonalities of volume, volatility, and illiquidity across
currencies and time, and an intuitive closed-form solution for the price impact measure.
Using unique (intraday) data representative for the global FX spot market, the
empirical analysis validates our theoretical predictions.

Keywords: FX Trading Volume, Volatility, Illiquidity, MDH, Commonalities, Co-Jumps

JEL Classification: C15, F31, G12, G15

Suggested Citation

Ranaldo, Angelo and Santucci de Magistris, Paolo, Trading Volume, Illiquidity and Commonalities in FX Markets. University of St.Gallen, School of Finance Research Paper No. 2018/23. Available at SSRN: https://ssrn.com/abstract=3289026 or http://dx.doi.org/10.2139/ssrn.3289026

Angelo Ranaldo (Contact Author)

University of St. Gallen ( email )

Swiss Institute of Banking and Finance s/bf-HSG
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://www.sbf.unisg.ch/Lehrstuehle/Lehrstuhl_Ranaldo/Homepage_Ranaldo.aspx

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Paolo Santucci de Magistris

Aarhus University - CREATES ( email )

Department of Economics and Business Economics
Fuglesangs Allè 4
Aarhus V, 8210
Denmark

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