Abstract
This paper investigate whether the effects of U.S. news announcements has influence on liquidity commonality during financial crisis periods. We construct a market-wide liquidity risk in the foreign exchange market by using Generalized Dynamic Factor Model (GDFM) model. We show that strong commonality in liquidity are associated with major crisis events. Our analysis also indicates that price volatility produced by U.S. macroeconomic news release are able to influence levels of commonality in liquidity. Furthermore, we find that quantitative easing policies injects high capital inflows into market to improve financial sector's funding liquidity, which might cause a decrease in commonality in liquidity. Finally, we present evidence that either from supply-side forces related to the funding liquidity and to investors' fear or from market volatility related to the dealer inventory cost and to news surprise, which have a significant influence on market-wide FX liquidity.
Published Version
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