Development and Functioning of FX Markets in Asia and the Pacific

56 Pages Posted: 11 Jan 2017

See all articles by Richard M. Levich

Richard M. Levich

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Frank Packer

Bank for International Settlements (BIS)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2017

Abstract

Global foreign exchange (FX) trading volume in traditional FX products and derivatives in Asia and the Pacific has expanded rapidly over the last fifteen years, more so than in other regions. Asian currencies also have experienced exceptional growth in offshore turnover, including non‐deliverable forwards (NDFs). Trading activity on this scale spread across many countries and currencies underscores the need for a well‐functioning infrastructure and exceptional risk management processes. While settlement risks are mitigated for the vast majority of turnover through systems like CLS Bank, the Asia Pacific region would benefit by having more countries and currencies become CLS enabled or tradable under other Payment versus payment (PVP) systems. Though less pronounced than during the global financial crisis, FX markets in the region experienced added turbulence during the “taper tantrum” period of 2013. High turnover currencies tended to depreciate more after taper announcements; though volatility rose more sharply in currencies with low turnover. The FX market is a prominent venue for carry trades that are subject to crash risk. While there is some evidence of herding behavior exacerbating this risk over the past decade, the measures calibrated more recently do not suggest exceptional crowding into carry trades ahead of the “taper tantrum” in 2013. At the same time, our measures of crowdedness for the carry trade show considerable variation over time. Making crowdedness measures publicly available might be advisable.

Suggested Citation

Levich, Richard M. and Packer, Frank, Development and Functioning of FX Markets in Asia and the Pacific (February 2017). Financial Markets, Institutions & Instruments, Vol. 26, Issue 1, pp. 3-58, 2017. Available at SSRN: https://ssrn.com/abstract=2897184 or http://dx.doi.org/10.1111/fmii.12079

Richard M. Levich (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0422 (Phone)
212-995-4256 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Frank Packer

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland
4161 280 8449 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
0
Abstract Views
128
PlumX Metrics