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Liquidity in FX spot and forward markets

Author

Listed:
  • Ingomar Krohn

    (University of Warwick)

  • Vladyslav Sushko

    (Bank for International Settlements)

Abstract

This paper assesses liquidity conditions in foreign exchange (FX) spot and derivatives markets using intra-day data for a period after the global financial crisis. Given that FX forwards and swap markets are by some measures even deeper that the spot market, an assessment of FX liquidity requires taking such instruments into account. We find that spot and forward market liquidity is intimately linked. Furthermore, the co-movement between FX funding and market liquidity, as gleaned from the pricing of both types of instruments, has increased over time. This development is tied to dealer balance sheet capacity. While top dealers dominate liquidity provision in spot through- out the sample period, they tend to pull back from market-making in FX forwards and swaps around regulatory reporting periods. This has shifted market-making activity in FX derivatives onto smaller, more expensive and less informed, dealers, and has also resulted in adverse spillovers to liquidity conditions in spot markets.

Suggested Citation

  • Ingomar Krohn & Vladyslav Sushko, 2017. "Liquidity in FX spot and forward markets," GRU Working Paper Series GRU_2017_019, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2017_019
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    File URL: https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232017-019%20Krohn%20Sushko.pdf
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    More about this item

    Keywords

    Foreign Exchange; Market liquidity; Funding liquidity; Microstructure; Dealer activity;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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