Exchange Rates and Liquidity Risk

  • Martin D.D. EVANS Georgetown University, United States of America

Abstract

I use Forex trading data to study how risks associated with the lack of liquidity contribute to the dynamics of 17 spot exchange rates through their time-varying contributions to risk premia. I find that liquidity risk matters. All the foreign exchange risk premia compensate investors for exposure to liquidity risk; and, for many currencies, exposure to liquidity risk appears to be more important than exposure to the traditional carry and momentum risk factors. I also find that variations in the price of liquidity risk make economically important contributions to the behavior of individual foreign currency returns: they account for approximately 34%, on average, of the variability in currency returns compared to the contribution of approximately 8% from the prices of carry and momentum risk.

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Published
2020-12-23
How to Cite
EVANS, Martin D.D.. Exchange Rates and Liquidity Risk. Journal of Advanced Studies in Finance, [S.l.], v. 11, n. 2, p. 159-182, dec. 2020. ISSN 2068-8393. Available at: <https://journals.aserspublishing.eu/jasf/article/view/5765>. Date accessed: 11 may 2021. doi: https://doi.org/10.14505//jasf.v11.2(22).08.
Section
Journal of Advanced Studies in Finance