{"title":"Measuring liquidity risk effects on carry trades across currencies and regimes","authors":"Samuel Abankwa , Lloyd P. Blenman","doi":"10.1016/j.mulfin.2021.100683","DOIUrl":null,"url":null,"abstract":"<div><p>We study the effects of FX liquidity risk on carry trade returns using a novel low-frequency market-wide liquidity measure. We show conclusively that the vast majority of variation in carry trade returns can be explained by two risk factors (liquidity risk and market risk). Our results are further corroborated when the mimicking liquidity risk factor is replaced with a non-tradable innovations risk factor. Safe-haven currencies (SHC) provide insurance against crash risk by having negative liquidity betas, across all time periods. SHCs provide the highest levels of protection during periods of extreme volatility. We find that liquidity risk is priced in the cross-section of carry trade returns, and estimate the liquidity risk premium in the FX market to be around 412 basis points per annum.</p></div>","PeriodicalId":47268,"journal":{"name":"Journal of Multinational Financial Management","volume":null,"pages":null},"PeriodicalIF":2.9000,"publicationDate":"2021-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1016/j.mulfin.2021.100683","citationCount":"12","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Multinational Financial Management","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1042444X21000074","RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 12
Abstract
We study the effects of FX liquidity risk on carry trade returns using a novel low-frequency market-wide liquidity measure. We show conclusively that the vast majority of variation in carry trade returns can be explained by two risk factors (liquidity risk and market risk). Our results are further corroborated when the mimicking liquidity risk factor is replaced with a non-tradable innovations risk factor. Safe-haven currencies (SHC) provide insurance against crash risk by having negative liquidity betas, across all time periods. SHCs provide the highest levels of protection during periods of extreme volatility. We find that liquidity risk is priced in the cross-section of carry trade returns, and estimate the liquidity risk premium in the FX market to be around 412 basis points per annum.
期刊介绍：
International trade, financing and investments have grown at an extremely rapid pace in recent years, and the operations of corporations have become increasingly multinationalized. Corporate executives buying and selling goods and services, and making financing and investment decisions across national boundaries, have developed policies and procedures for managing cash flows denominated in foreign currencies. These policies and procedures, and the related managerial actions of executives, change as new relevant information becomes available. The purpose of the Journal of Multinational Financial Management is to publish rigorous, original articles dealing with the management of the multinational enterprise. Theoretical, conceptual, and empirical papers providing meaningful insights into the subject areas will be considered. The following topic areas, although not exhaustive, are representative of the coverage in this Journal. • Foreign exchange risk management • International capital budgeting • Forecasting exchange rates • Foreign direct investment • Hedging strategies • Cost of capital • Managing transaction exposure • Political risk assessment • International working capital management • International financial planning • International tax management • International diversification • Transfer pricing strategies • International liability management • International mergers.
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