Asymmetric liquidity risk and currency returns before and during COVID-19 pandemic

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Motivated by the asymmetric nature of liquidity and currency return, we set out a new liquidity-adjusted extreme risk asset pricing model. Our model estimates asymmetric risk using downside beta, downside co-skewness, and excess co-kurtosis. The empirical finding strongly supports the extreme liquidity risk measures to explain the carry trade. Thus confirming that to capture better the extreme risk exposure in liquidity and currency return, it is necessary to highlight asymmetries across up and down markets using downside co-skewness and excess kurtosis. Further, we found their effect to be more pronounced during the COVID-19 period. Therefore, ignoring these exposures, especially during crises, will lead to risk and return profile, deviating from its true nature.