TY - JOUR
T1 - Liquidity Commonality in Foreign Exchange Markets During the Global Financial Crisis and the Sovereign Debt Crisis
T2 - Effects of Macroeconomic and Quantitative Easing Announcements
AU - Chang, Ya Ting
AU - Gau, Yin Feng
AU - Hsu, Chih Chiang
N1 - Publisher Copyright:
© 2017 Elsevier Inc.
PY - 2017/11
Y1 - 2017/11
N2 - Noting the time-varying dynamics in liquidity, we use a generalized dynamic factor model (GDFM) to identify market-wide liquidity across foreign exchange (FX) markets. Liquidity commonality across currencies increases during the 2008–2009 global financial crisis and the 2009–2011 European sovereign debt crisis, which affirms the spiral effect between funding liquidity and FX market liquidity. The effect of funding constraint on liquidity in the FX market may be through carry trade activities that link the FX market and other classes of asset markets, as suggested by Melvin and Taylor (2009) and Banti (2016). The shift in liquidity commonality around the release of macroeconomic announcements also can be related to the spurs of unwinding carry trade positions in response to unexpected macro shock that affects interest rate differential. In contrast, quantitative easing (QE) policies in the United States, which inject high capital inflows into financial markets, are associated with decreased liquidity commonality, implying that QE implementation actually improves the funding liquidity and weakens the spiral effect, ultimately inducing weaker commonality in FX liquidity.
AB - Noting the time-varying dynamics in liquidity, we use a generalized dynamic factor model (GDFM) to identify market-wide liquidity across foreign exchange (FX) markets. Liquidity commonality across currencies increases during the 2008–2009 global financial crisis and the 2009–2011 European sovereign debt crisis, which affirms the spiral effect between funding liquidity and FX market liquidity. The effect of funding constraint on liquidity in the FX market may be through carry trade activities that link the FX market and other classes of asset markets, as suggested by Melvin and Taylor (2009) and Banti (2016). The shift in liquidity commonality around the release of macroeconomic announcements also can be related to the spurs of unwinding carry trade positions in response to unexpected macro shock that affects interest rate differential. In contrast, quantitative easing (QE) policies in the United States, which inject high capital inflows into financial markets, are associated with decreased liquidity commonality, implying that QE implementation actually improves the funding liquidity and weakens the spiral effect, ultimately inducing weaker commonality in FX liquidity.
KW - Foreign exchange market
KW - Liquidity commonality
KW - Macroeconomic announcements
KW - Quantitative easing policies
UR - http://www.scopus.com/inward/record.url?scp=85026246244&partnerID=8YFLogxK
U2 - 10.1016/j.najef.2017.06.004
DO - 10.1016/j.najef.2017.06.004
M3 - 期刊論文
AN - SCOPUS:85026246244
VL - 42
SP - 172
EP - 192
JO - North American Journal of Economics and Finance
JF - North American Journal of Economics and Finance
SN - 1062-9408
ER -