A new version of the paper “Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums” is available on SSRN.
We have rewritten the abstract, introduction, conclusion, and various sections of the paper. In the new version, we focus on the main, more surprising findings on liquidity and their implications for asset managers and central banks. In particular we highlight the novel economic mechanism through which liquidity risk impacts carry trade returns that emerges from our analysis.
Moreover, we have extended the analysis of the link between FX liquidity and equity liquidity. We now also compare FX liquidity measures to market-wide liquidity measures of the corporate bond market and 10-year U.S. Treasury bonds. Liquidities across all markets appear to comove significantly, suggesting that liquidity risk is indeed a global phenomenon across asset classes.
We have performed various additional robustness checks which confirm the results reported in the paper. We have collected additional findings in the separate appendix and streamlined the paper accordingly.