Liquidity in the Global Currency Market
44 Pages Posted: 22 Nov 2018 Last revised: 3 Oct 2022
Date Written: September 5, 2022
We study the liquidity of the global currency market by analyzing the price impact of trading volume. We analyze a decade of CLS intraday data representative of global foreign exchange (FX) trading by developing a refinement of the popular Amihud (2002) illiquidity measure that we callrealized Amihud, which is the ratio between realized volatility and trading volume. Inversely related to market depth, price impact increases with transaction costs, money market stress, uncertainty, and risk aversion. Furthermore, we analyze whether and how liquidity begets price efficiency by looking at violations of the “triangular” no-arbitrage condition. We nd that dollar-based currencies offer a lower trading impact supporting price efficiency.
Keywords: Foreign Exchange, Global Market, Liquidity, Price Impact, Arbitrage.
JEL Classification: C15, F31, G12, G15
Suggested Citation: Suggested Citation