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Liquidity, Risk Appetite and Exchange Rate Movements During the Financial Crisis of 2007-2009

Author

Listed:
  • Cho-Hoi Hui

    (Research Department, Hong Kong Monetary Authority)

  • Hans Genberg

    (Research Department, Hong Kong Monetary Authority)

  • Tsz-Kin Chung

    (Research Department, Hong Kong Monetary Authority)

Abstract

Given the deleveraging process in the banking sector, banks were reluctant to lend funds in the interbank market because of uncertainty about their own future need for funds during the financial crisis of 2007 - 2009. Aggregate liquidity then declined. This paper investigates the impact of the market-wide liquidity risk and carry-trade incentives on exchange rate movements. The results suggest that liquidity risk measured by the spread between LIBOR and the overnight index swap rate was a significant factor affecting the exchange-rate movements of the euro, British pound and Swiss franc, while carry trades were important for the Japanese yen, Australian dollar and New Zealand dollar.

Suggested Citation

  • Cho-Hoi Hui & Hans Genberg & Tsz-Kin Chung, 2009. "Liquidity, Risk Appetite and Exchange Rate Movements During the Financial Crisis of 2007-2009," Working Papers 0911, Hong Kong Monetary Authority.
    • Handle: RePEc:hkg:wpaper:0911
    as

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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP09_11_full.pdf
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    References listed on IDEAS

    as
    1. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
    2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    3. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009. "Carry Trades and Currency Crashes," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347, National Bureau of Economic Research, Inc.
    4. McAndrews, James & Sarkar, Asani & Wang, Zhenyu, 2017. "The effect of the term auction facility on the London interbank offered rate," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 135-152.
    5. Tobias Adrian & Erkko Etula & Hyun Song Shin, 2009. "Risk appetite and exchange Rates," Staff Reports 361, Federal Reserve Bank of New York.
    6. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March.
    7. Alain P. Chaboud & Joseph E. Gagnon, 2007. "What can the data tell us about carry trades in Japanese yen?," International Finance Discussion Papers 899, Board of Governors of the Federal Reserve System (U.S.).
    8. François-Louis Michaud & Christian Upper, 2008. "What drives interbank rates? Evidence from the Libor panel," BIS Quarterly Review, Bank for International Settlements, March.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Roberto Casarin & Marco Tronzano & Domenico Sartore, 2013. "Bayesian Markov Switching Stochastic Correlation Models," Working Papers 2013:11, Department of Economics, University of Venice "Ca' Foscari".
    2. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    3. Ji, Philip Inyeob & In, Francis, 2010. "The impact of the global financial crisis on the cross-currency linkage of LIBOR-OIS spreads," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(5), pages 575-589, December.

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    More about this item

    Keywords

    Sub-prime crisis; carry trades; liquidity; leverage;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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