Commonality in FX Liquidity: High-Frequency Evidence
13 Pages Posted: 10 Apr 2020 Last revised: 14 Apr 2020
Date Written: March 23, 2020
We test the existence and reveal the main properties of commonality in liquidity for the foreign exchange (FX) markets at the high-frequency level. Accordingly, commonality in FX liquidity exists even at the high-frequency level and it has been gradually increasing over the last few years. Unlike ECB, monetary policy announcement made by Fed significantly increases this commonality. Moreover, commonality in FX liquidity has a significant positive impact on the commonality in FX return series, indicating that an increase in the intraday systematic liquidity risk might trigger a negative aggregate liquidity-return spiral in the FX markets.
Keywords: Commonality in liquidity, foreign exchange, high-frequency trading, transaction cost, systematic risk
JEL Classification: D23, D82, F31, G15, G23
Suggested Citation: Suggested Citation