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Analysis of the concentration of FX supply and demand in the local market

Author

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  • Aleksa Smiljanic

    (National Bank of Serbia)

Abstract

The paper looks into the impact of the concentration of residents and non-residents’ FX supply and demand on the total amount of FX supply and demand of these banking clients. Our intention was to identify any trends and correlations with other market indicators in the observed ten-year period. For the purpose of studying the concentration of FX supply and demand, we used the Herfindahl-Hirschman index which has been proven to be a statistically significant regressor when explaining movements in net FX demand by residents and non-residents. The results showed the presence of a multi-year positive trend of decrease in the concentration of FX supply, i.e. diversification of FX sources, driven by dynamic growth in the number of residents supplying FX. On the other hand, there are multiple indicators suggesting that our FX market is still characterised by relatively low liquidity. However, during the period of structural appreciation pressures, namely in 2017, there was a noticeable gradual increase in the FX supply capacity to “absorb” FX demand on days when demand was more concentrated, which reflects the increase in the number of residents supplying FX and the diversification of FX sources.

Suggested Citation

  • Aleksa Smiljanic, 2023. "Analysis of the concentration of FX supply and demand in the local market," Working Papers Bulletin 18, National Bank of Serbia.
    • Handle: RePEc:nsb:bilten:18
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    More about this item

    Keywords

    concentration of FX supply and demand; Herfindahl-Hirschman index; diversification of FX sources;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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