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Liquidity Problems in the FX Liquid Market: Ask for the 'Bil'

39 Pages Posted: 4 Apr 2010  

Vladimir Borgy

Banque de France

Julien Idier

Banque de France - Centre de Recherche; European Central Bank (ECB)

Gaëlle Le Fol

Université Paris - Dauphine, PSL Research University; National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

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Date Written: March 29, 2010

Abstract

Even though the FX market is one of the most liquid financial market, it would be an error to consider that it is immune against any liquidity problem. This paper analyzes on a long sample (2000-2009), the all set of quotes and transactions in three main currency pairs (EURJPY, EURUSD, USDJPY) on the EBS platform. To characterize the FX market liquidity, we consider the spread, the traded volume, the number of transactions and the Amihud (2002) statistic for illiquidity. We also propose the computation of a new liquidity indicator, BIL, that solely relies on price series availability. The main benefit of such measure is to be easily calculated on almost any financial market as well as to have a clear interpretation in terms of liquidity costs. Using all these advanced liquidity analyses, we finally test the accuracy of these measures to detect liquidity problems in the FX market. Our analysis, based on a signalling approach, shows that liquidity problems have arisen during specific episodes in the early 2000’s and during the recent financial turmoil.

Keywords: FX market, Liquidity, Financial crisis

JEL Classification: G01, G15, F31

Suggested Citation

Borgy, Vladimir and Idier, Julien and Le Fol, Gaëlle, Liquidity Problems in the FX Liquid Market: Ask for the 'Bil' (March 29, 2010). Available at SSRN: https://ssrn.com/abstract=1580072 or http://dx.doi.org/10.2139/ssrn.1580072

Vladimir Borgy

Banque de France ( email )

Paris
France

Julien Idier

Banque de France - Centre de Recherche ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gaëlle Le Fol (Contact Author)

Université Paris - Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

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