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Foreign Exchange Swap Liquidity

Author

Listed:
  • Peteris Kloks

    (University of St. Gallen)

  • Edouard Mattille

    (University of St. Gallen)

  • Angelo Ranaldo

    (University of St. Gallen; Swiss Finance Institute)

Abstract

This paper presents the first comprehensive examination of liquidity in the global foreign exchange (FX) swap market. Our analysis employs effective measures that assess both the tightness and depth of the global market. We identify three main findings: First, FX swap liquidity is fragmented across currencies, tenors, and time. Second, liquidity conditions worsen when dealers’ balance sheet capacity shrinks, especially at quarter-end reporting dates. However, we observe a simultaneous surge in short-term volumes; we rationalize this through a difference-in-differences analysis suggesting a demand channel for FX swaps during reporting windows. Third, we build a measure of pricing efficiency based on the law of one price and show that illiquidity impairs efficiency even during periods when dealers’ regulatory constraints are slack.

Suggested Citation

  • Peteris Kloks & Edouard Mattille & Angelo Ranaldo, 2023. "Foreign Exchange Swap Liquidity," Swiss Finance Institute Research Paper Series 23-22, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2322
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    More about this item

    Keywords

    exchange swap; Global currency market; Market liquidity; Dealers; Price efficiency.;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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