FX Spot and Swap Market Liquidity Spillovers

65 Pages Posted: 28 Dec 2017 Last revised: 25 Jun 2021

See all articles by Ingomar Krohn

Ingomar Krohn

Bank of Canada

Vladyslav Sushko

Bank for International Settlements (BIS)

Multiple version iconThere are 2 versions of this paper

Date Written: January 13, 2020


We study the joint evolution of foreign exchange (FX) spot and swap market liquidity. Trading in FX swaps exceeds that of spot, yet this market segment has been largely ignored in prior research on liquidity in FX markets. We find strong co-movement in spot and swap market liquidity conditions and a strong link between FX funding and market liquidity, as gleaned from the pricing of both instruments. This link has strengthened over time with changes in dealer behaviour. Some of the largest dealers periodically pull back from pricing FX swaps and wider spreads attract smaller dealers. At the same time, liquidity in FX swaps remains impaired, which leads to adverse illiquidity spillovers to the spot market. Our findings suggest that funding liquidity has become a more important driver of spot market liquidity than it used to be.

Keywords: Foreign Exchange, Market liquidity, Funding liquidity, Microstructure, Dealer activity, Window dressing

JEL Classification: F31, G15

Suggested Citation

Krohn, Ingomar and Sushko, Vladyslav, FX Spot and Swap Market Liquidity Spillovers (January 13, 2020). WBS Finance Group Research Paper No. 243, Available at SSRN: https://ssrn.com/abstract=3092248 or http://dx.doi.org/10.2139/ssrn.3092248

Ingomar Krohn

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9

Vladyslav Sushko (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics