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A span of continuous trades and liquidity dynamics in foreign exchange markets

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  • Chih‐Chung Chien
  • Shikuan Chen
  • Ming‐Jen Chang

Abstract

This study incorporates the spans of sequences of continuous trades and reversal trades to investigate whether the currency liquidity is varying with the span of continuous trades or reversal trades. We highlight the dependency between the span of continuous trades and the realized bid‐ask spread to explain the currency liquidity dynamics using high‐frequency foreign exchange data. Our findings show that the spans of continuous trades play an important role in determining the market liquidity because a larger span of a continuous sequence puts a drain on the market liquidity and thereby consumes the funding liquidity, eventually increasing the bid‐ask spread.

Suggested Citation

  • Chih‐Chung Chien & Shikuan Chen & Ming‐Jen Chang, 2023. "A span of continuous trades and liquidity dynamics in foreign exchange markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 144-168, January.
    • Handle: RePEc:wly:ijfiec:v:28:y:2023:i:1:p:144-168
    DOI: 10.1002/ijfe.2410
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