Liquidity Problems in the FX Liquid Market: Ask for the 'Bil'
Banque de France
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)
March 29, 2010
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.
Number of Pages in PDF File: 39
Keywords: FX market, Liquidity, Financial crisis
JEL Classification: G01, G15, F31
Date posted: April 4, 2010