Understanding FX Liquidity

Nina Karnaukh, Angelo Ranaldo, Paul Sderlind

First Draft, 20 September 2013
Comments are welcome

Abstract
Previous studies of liquidity in the foreign exchange (FX) market span short time
periods or focus on specific measures of liquidity. In contrast, we provide a comprehensive study of FX liquidity and commonality over more than two decades and a
cross-section of forty exchange rates. After identifying the most accurate liquidity
proxies based on low-frequency and readily available data, we show that commonality in FX liquidities is stronger for developed currencies and in highly volatile
markets. We also show that FX liquidity deteriorates with risk in stock, bond and FX
markets, and that riskier currencies are more exposed to liquidity drops.
Keywords: exchange rates, liquidity, transaction costs, commonality, low-frequency
data.
JEL Classification: C15, F31, G12, G15

University of St. Gallen. Address: SBF, University of St. Gallen, Rosenbergstrasse 52, CH9000 St. Gallen, Switzerland. E-mail addresses: Nina.Karnaukh@student.unisg.ch (N. Karnaukh), Angelo.Ranaldo@unisg.ch (A. Ranaldo), Paul.Soderlind@unisg.ch (P. Sderlind). We thank Yakov Amihud,
Roberto Ren, Loriano Mancini, Avanidhar Subrahmanyam, Jan Wrampelmeyer, and Rico von Wyss, as
well as participants of the 2013 Arne Ryde Workshop in Financial Economics in Lund and 2013 Workshop Measuring and Modeling Financial Risk with High Frequency Data in Florence for comments and
suggestions.

Introduction

How does liquidity of the foreign exchange market (FX) evolve across time and how does
it differ across currency pairs? Does FX liquidity deteriorate with an increase of risk in
stock and bond markets? Do funding strains decrease FX liquidity? Does FX liquidity
co-move with stock and bond market liquidities? Are riskier currencies more exposed
to liquidity drops? Do common patterns in FX liquidity strengthen in highly volatile
markets? In this paper, we address these relevant questions.
Financial markets need liquidity to function well. This is true also for the FX market that determines the relative values of currencies and any related assets. This paper
provides a comprehensive study of FX liquidity and commonality. It defines the most
accurate low-frequency liquidity measures and it offers a method to gauge FX liquidity on aggregate and currency-pair levels. More importantly, it documents when and for
which currencies commonality in FX liquidities is stronger and which factors explain the
time-series and cross-sectional variation of FX liquidity.
An in-depth understanding of FX liquidity is important for several reasons. First,
illiquidity erodes asset returns and liquidity risk demands a premium (e.g. Amihud and
Mendelson (1986)). This has been widely documented in the literature on stocks (e.g.
Pstor and Stambaugh (2003) and Acharya and Pedersen (2005)) and other assets but
only recently on foreign exchange (Christiansen, Ranaldo, and Sderlind (2011), Banti,
Phylaktis, and Sarno (2012), Mancini, Ranaldo, and Wrampelmeyer (2012)). However,
a clear understanding of why and how FX illiquidity materializes is still missing. Second, a new strand of theoretical models (thereafter called liquidity spirals theories)
sheds light on the intricate linkages between market liquidity, funding liquidity and risk
(e.g. Brunnermeier and Pedersen (2009) and Vayanos and Gromb (2002)). Empirically,
Brunnermeier, Nagel, and Pedersen (2009) show that financial crises are typically associated with unwinding carry trade and liquidity drops (Brunnermeier, Nagel, and Pedersen
(2009)) and Mancini, Ranaldo, and Wrampelmeyer (2012) show that after the Lehman
bankruptcy, even the nine most liquid FX rates suffered from sharp liquidity drops. But
more aspects need to be studied empirically. For instance, it is not clear how FX liquidity
relates to developments of risk and return on the global asset markets and how individual
FX rates react to distressed markets.
The FX market is the worlds largest financial market with a daily average trading

volume of four trillion U.S. dollars in 2013 (Bank of International Settlements (2013)).
Liquidity in the FX market is crucial to guarantee efficiency and arbitrage conditions in
many other markets including bonds and derivatives. Despite its importance, the literature
on FX liquidity is scant or limited to specific measures such as the order flow1 or the
bid-ask spread based on indicative quotes.2 Using high-frequency data from 2007 to
2009, Mancini, Ranaldo, and Wrampelmeyer (2012) provide an accurate measurement of
FX liquidity. We closely follow this study to build our benchmark measures. However,
none of the previous papers studies the possibility of accurately measuring FX liquidity
and commonality in FX liquidities using low-frequency and readily available data. More
importantly, none of the previous studies performs a comprehensive analysis of liquidity
measures over an extended period of time (in our case, more than 20 years) and a large
cross-section of currencies (in our case, forty exchange rates).
To address our research questions, we need to construct reliable liquidity measures
from price data that are readily available on a daily frequency. Low-frequency liquidity
measures are necessary since high-frequency data have several disadvantages, including
a very limited access only to recent data, a restricted and delayed use, the need of timeconsuming data handling and filtering techniques.
We use two main sources of data: first, low-frequency data from Thomson Reuters
(a very common data provider) from which we compute many low-frequency liquidity
measures widely used in the equity and bond literature. Second, high-frequency and
sophisticated data from Electronic Broking Services (EBS), which is the leading platform
for FX spot interdealer trading, from which we derive the benchmark measures of FX
liquidity. Then, we compare the low-frequency and high-frequency measures on the nine
mostly traded currency pairs over the period January 2007 to May 2012.
Due to the limited data sets with high-quality trade and quote data, researchers have
for decades been looking for reliable low-frequency measures of market liquidity. Roll
(1984) introduced a simple proxy for the effective spread that can be estimated using
low-frequency data. A number of studies were later conducted to develop further liquidity proxies from daily data on the stock market (Lesmond, Ogden, and Trzcinka (1999),
1

Following the seminal work of Evans and Lyons (2002) on the FX order flow, several papers investigate
the role of the FX order flow including Marsh and ORourke (2011), Breedon and Vitale (2010), Breedon
and Ranaldo (2012), Berger, Chaboud, Chernenko, Howorka, and Wright (2008) and Banti, Phylaktis, and
Sarno (2012).
2
See Bessembinder (1994), Bollerslev and Melvin (1994), Lee (1994), and Hsieh and Kleidon (1996)
and more recently Menkhoff, Sarno, Schmeling, and Schrimpf (2012a).

Amihud (2002), Pstor and Stambaugh (2003), Hasbrouck (2009), Holden (2009), Corwin and Schultz (2012)). With the increased importance of liquidity during the financial crisis, several papers addressed liquidity on the corporate bonds market (Bao, Pan,
and Wang (2011), Dick-Nielsen, Feldhtter, and Lando (2012)), government bond market (Hu, Pan, and Wang (2012)), and OTC market (Deuskar, Gupta, and Subrahmanyam
(2011)).3
Several studies compare low-frequency and high-frequency liquidity measures for
stocks (Hasbrouck (2009), Goyenko, Holden, and Trzcinka (2009), Holden (2009), Fong,
Holden, and Trzcinka (2011)) and commodities (Marshall, Nguyen, and Visaltanachoti
(2012)), to provide a guide to the most accurate low-frequency measures in the absence
of high-frequency information. But to our knowledge, there is no such study of FX liquidity. By identifying the best low-frequency liquidity measures, we therefore aim to fill
a gap in the literature. This permits us to measure FX liquidity across a large panel of
currency pairs, over an extended period of time.
We find that the Corwin-Schultz (Corwin and Schultz (2012)), the Gibbs sampler estimate of Rolls model (Hasbrouck (2009)), and volatility dominate other low-frequency
measures in the sense of having the highest time-series correlation with the (high-frequency)
benchmarks. For instance, the daily bid-ask spread based on daily snaps of indicative
quotes and some other measures that often perform well in gauging liquidity in the stock
and corporate bond markets work less well on the FX market.
Based on these findings, we construct a systematic low-frequency measure as the first
principal component across the best low-frequency measures and across all currencies.
Over January 2007 to May 2012, this measure has a 0.93 correlation with an effective
cost liquidity measure constructed from the EBS data. We provide monthly estimates of
the low-frequency FX liquidity measure based on forty currencies over January 1991 to
May 2012.
[Figure 1 about here.]
The availability of reliable LF measures of FX liquidity is important in practice. For
instance, one can estimate FX trading costs using the estimated coefficients by fitting lowfrequency FX liquidity to high-frequency effective cost. To illustrate it, Figure 1 shows
two historical cases, i.e. the Black Wednesday and Lehman collapse in September
3

See Johann and Theissen (2013) for a recent and comprehensive survey.

1992 and 2008, respectively. In the earlier episode the British government was forced
to withdraw the pound sterling from the European Exchange Rate Mechanism. The estimated effective spread on GBP/USD that was around 0.5 basis points in August 1992
increased approximately by three times. By the end of October 2008 after the Lehman
bust, the effective spread measure on AUD/USD increased by 4 times (i.e. from 0.9 to 4.1
b.p.)! Both FX rates would have been involved in typical carry trade strategies since the
money market rates in GBP and AUD were the highest (across the panel) while the USD
money market rate was the lowest interest rates in August 1992 and the second-lowest
rate in August 2008. Since any international portfolio position involves FX trading costs
and eventually liquidity risk, LF measures of FX liquidities can help estimate (net) returns
and risks related to international portfolio allocations.
After having found the most reliable low-frequency measures of FX liquidity, we can
perform the main analysis of this paper, i.e. studying the properties of FX liquidity and
commonality. First, we follow the previous literature on commonality in stock liquidities.
We find strong commonality in FX liquidities, stronger than that on the stock market.
Commonality is particularly remarkable for developed currencies and in highly volatile
markets. We also find that FX liquidity comoves with stock and bond market liquidity
suggesting cross-market liquidity movements.
Second, we find that FX systematic illiquidity can be explained by increases of risk in
stock and bond markets in addition to FX riskconsistent with flight-to-quality or flightto-liquidity episodes. Thus, we find that cross-markets linkages not only via volatility
(Fleming, Kirby, and Ostdiek (1998)) but via illiquidity as well. These findings add to
the extant literature on the interconnections between stock-bond illiquidity (Goyenko and
Ukhov (2009)) by showing that FX liquidity is tied to stock and bond risk and liquidities.
Our results are also in line with the liquidity spirals theories, i.e. an adverse shock and
an increase in volatility trigger feedback loops between funding constraints and market
illiquidity. In the last part of this paper, we analyze currency-pair liquidities. We find
that riskier currencies are more exposed to liquidity drops. More specifically, liquidity
of riskier currencies tends to decrease more with an increase of risk in stock and bond
market as well as tighter funding constraints.
The paper proceeds as follows. Section 2 documents the data; sections 3 and 4 discusses the high-frequency and low-frequency methods, respectively; sections 5 and 6
present the results on FX systematic and currency-pair liquidities, respectively; section 7
5

concludes.

Data

Hereafter, we will use the abbreviations LF and HF to refer to low-frequency and highfrequency. We obtain HF data from ICAP that runs the leading interdealer electronic FX
platform called Electronic Broking Services (EBS). The EBS data set spans January 2007
to May 2012 and it is organized on a one-second basis (i.e. 86,400 observations per day).
This rich source of information contains order and transaction data. From the order data,
we use the prevailing bid and ask (offer) quotes. From the trading data, we keep track of
the transaction price and trade direction (i.e. if the trade was buyer- or seller-initiated).
From the trade direction, we compute the order flow as the number of buys minus the
number of sells over a given period.
EBS quotes reliably represent the prevalent spot interdealer exchange rates. Dealers
on the EBS platform are prescreened for credit and bilateral credit lines, which together
with the continuously monitoring by the system, makes the potential counterparty risk
virtually negligible.4
We use HF data on nine currency pairs, namely the AUD/USD, EUR/CHF, EUR/GBP,
EUR/JPY, GBP /USD, USD/CAD, USD/CHF, and USD/JPY. These exchange rates accounted for 71% of daily average trading volume in April 2013 (see Bank of International
Settlements (2013)). For every second, we compute log-returns using the midpoint of the
best bid and ask quotes or alternatively, the transaction price. Observations between Friday 10 p.m. and Sunday 10 p.m. GMT are excluded, since only minimal trading activity
is observed during these non-standard hours.5
The LF data are daily high, low, bid, ask and midquote prices as well as trading
volumes from Datastream Thomson Reuters. Daily close bid, ask and midquote prices
are snapped at 21:00 GMT. The data set covers 1991 to 2012 and it includes forty exchange rates (over 84% of daily average trading volume in April 2013). The EUR/USD
is replaced with the DEM/USD prior to 1999. The other FX rates against the EUR are replaced with the quotes against the ECU prior to 1999 due to data availability in Thomson
4

Chaboud, Chernenko, and Wright (2007) provide a descriptive study of the EBS data set.
We drop U.S. holidays and other days with unusually light trading activity from the data set. We also
remove a few obvious outlying observations. The internet appendix for Mancini, Ranaldo, and Wrampelmeyer (2012) discusses in detail the filtering procedure for the data.
5

Reuters.6 To guarantee a consistent matching between HF and LF data, we consider the

same set of trading days and we compute the daily measures from the EBS data taking
21:00 GMT as the end of the day. For one of our LF measures (LOT, see below), we also
use the daily effective exchange rate computed by the U.S. Federal Reserve.
To link FX liquidity with the variables of the main asset classes, we use a large dataset
of monthly return and risk measures on FX markets, US and global equity/corporate/
government bond markets, money market and central bank rates. All the data are available from January 1991 except from JP FX implied volatility and stock market liquidity,
which are accessible from April 1992 and January 1995, respectively. The description
and sources of these variables is available in the internet appendix. The stock market
liquidity is based on the PCA across price impact proxies of the monthly Amihud (2002)
measure, calculated as the value-weighted average of all individual stock in each country. We use data from Karolyi, Lee, and Dijk (2012) to get the Amihud (2002) measure
for each country, which currency appears in our sample of the forty exchange rates. The
bond market liquidity is the off-the-run liquidity premium the yield difference between
less and more liquid (off-the-run and on-the-run) ten-year nominal Treasury bonds.
The data on off-the-run bonds is from Gurkaynak, Sack, and Wright (2007), the data
on on-the-run bonds is from the St. Louis FRED database.

High-frequency measures

The HF data allows us to compute very accurate estimates of liquidity in the FX market.
The effective cost (EC) captures the cost of executing a trade. The EC is computed by
comparing transaction prices with the quotes prevailing at the time of execution as
( T
.P
P /=P; for buyer-initiated trades,
EC D
(1)
.P P T /=P; for seller-initiated trades,
with P denoting the transaction price, superscripts A and B ask and bid quotes, and P D
.P A C P B /=2 the midquote price. Following the previous literature, we refer to the EC
as the main benchmark measure for market liquidity.
6

The ECU was an accounting unit made up of the sum of fixed amounts of 12 out of then 15 currencies of
the European Union. The value of the ECU was calculated as weighted average of its component currencies,
please see details at http://fx.sauder.ubc.ca/ECU.html. The ECU was replaced by the EUR on a one-for-one
basis on 1 January 1999.

Another measure of transaction cost is the proportional quoted bid-ask spread, BA,
BA D .P A

P B /=P:

(2)

The price impact (PI) measures the FX return associated with the order flow (Kyle
(1985)). Similarly, the return reversal (RR) shows the reversal of the price to the fundamental value after the initial price impact (Campbell, Grossman, and Wang (1993)). We
estimate PI and RR from the linear regression

p t D # C PI  .b;t

s;t / C

5
X

k .b;t

s;t

k/

C "t ;

(3)

kD1

where
p t is the change of the log midquote price between t and t 1, b;t is the number
of buyer-initiated trades and s;t the number of seller-initiated trades at time t (i.e. the
order flow). For each day, we estimate the parameter vector #; PI; 1 ::: 5 . The price
impact PI is expected to be positive due to net buying pressure, while the return reversal
P
RRD 5kD1 k is expected to be negative.
The price dispersion (PD) or volatility is often used as an additional proxy for illiquidity (Chordia, Roll, and Subrahmanyam (2001)). To get a consistent and unbiased estimate,
we use the two-scale nonparametric estimator (At-Sahalia, Mykland, and Zhang (2005))
of realized volatility.7
A liquid exchange rate is associated with a lower value of EC, BA, PI, PD as well as
lower absolute value of (RR).

Low-frequency measures

For each exchange rate, we compute eight LF liquidity measures that are widely used
in the literature on stock and bond liquidity. This section summarizes these measures,
and more detailed information can be found in an internet appendix. We compute the LF
measures for each month, but later we consider other granularities.
Roll (1984) shows that a transaction cost induces a bid-ask bounce, so the cost can
be estimated from the (negative of the) autocovariance of the return process. Following
7

We compute the effective cost, bid-ask spread, price impact, return reversal and price dispersion for
each FX rate.

the previous literature, when the autocovariance is positive,8 we substitute the transaction
cost estimator with zero
( p
2
Cov.
p t ;
p t 1 /; when Cov.
p t ;
p t 1 / < 0,
Rol l D
(4)
0;
when Cov.
p t ;
p t 1 / > 0,
where
p t is the change of the log midquote price between t and t 1. The higher is the
Roll spread, the lower is the liquidity. We compute the Roll estimate for each month in
our sample using daily midquote prices.
The second LF liquidity measure is the gamma (BPW) measure put forward by Bao,
Pan, and Wang (2011) to measure liquidity in the corporate bond market, defined as
BP W D

Cov.
p t ;
p t

1 /:

(5)

Clearly, this is very similar to the Roll measure. We compute the BPW measure for each
month in our sample using daily midquote prices.
The third LF liquidity measure is the Bayesian Gibbs sampler estimate of the effective
cost in the Roll model (Hasbrouck (2009)). The higher is the Gibbs, the lower is liquidity.
We compute the Gibbs estimates for each month from the daily log midquote prices. We
run each Gibbs sampler for 1000 sweeps and discard first 200 draws. We calibrate the
prior for the transaction cost to get a good proxy of the HF benchmark.9 Details are
discussed in the robustness section.
The fourth LF liquidity measure is the relative bid-ask spread (BA) defined as in (2).
A high BA, indicates low liquidity. We obtain monthly estimates of BA by averaging the
daily bid-ask spreads.
The fifth LF liquidity measure is the high-low cost estimate CS from Corwin and
Schultz (2012). The basic idea is that the bid-ask spread is unaffected by the horizon
8

Positive autocovariances are not infrequent. For instance, Roll (1984) finds positive autocovariances
in roughly half of his sample. Goyenko, Holden, and Trzcinka (2009) also use the modified version of the
Roll estimator used in this paper.
9
Joel Hasbrouck generously provides the programming code of the Gibbs estimation procedure on his
web-site. We use this code for our estimations. This code uses a half-normal distribution
q - and we set (for
each currency and month) the standard deviation of the transaction cost prior equal to

pA

p B , where

p A and p B are the monthly averages of log ask and log bid prices, respectively. The estimates are robust to
this choice, unless we choose a very small value.

while the variance scales with the horizon. The CS is calculated as

p p
2.e 1/
CS D
,
with

D
.1
C
2/.
1 C e

/;

(6)

where is the sum (over two days) of the squared daily log(high/low) and is the squared
log(high/low) but where the high (low) is over two days. To estimate on a monthly basis,
we estimate spreads separately for each 2-day period and calculate the average across all
overlapping 2-day periods in the month. The higher is the CS, the lower is the liquidity. Following Corwin and Schultz (2012), we correct for overnight returns and negative
values (by setting the estimate to zero).
The sixth LF liquidity measure is the Effective Tick (Efftick) from Holden (2009) and
Goyenko, Holden, and Trzcinka (2009). This method estimates the transaction cost from
the clustering (relative frequency) of the last digits of the transaction prices. The basic
idea is that price clustering signals more bargaining power of market makers and less
competitive quotes. We implement the Holden method on daily midquote prices to get
monthly estimates.
The seventh LF liquidity measure is the transaction cost estimator LOT from Lesmond,
Ogden, and Trzcinka (1999). Its rationale is that the marginal investor trades only if expected gains outweigh the costs of trading. In this model, returns of a specific asset are
benchmarked against market returns. We implement this idea by benchmarking currencypair returns to the USD effective exchange rate.10 In line with Lesmond, Ogden, and
Trzcinka (1999), we define the three regions for FX returns (equal to zero, positive and
negative) and we perform a maximum likelihood estimation on daily returns for each
month.11
Finally, the eighth LF liquidity measure is an estimate of realized Volatility. Following
Menkhoff, Sarno, Schmeling, and Schrimpf (2012a), we calculate monthly averages of
the daily absolute returns. Although the microstructure theory relates transaction costs to
volatility in various ways (e.g. directly as in Roll (1984) and through inventory risk (e.g.,
Stoll (1978)) and probability of informed trading (e.g., Glosten and Milgrom (1985)),
volatility is clearly an indirect measure of FX liquidity that has been commonly used in
the literature (e.g., Chordia, Roll, and Subrahmanyam (2001)).
10

The USD effective exchange rate represents the market trade-weighted value of the USD against the
other currencies.
11
We are very grateful to David Lesmond for providing us with the code for computing the LOT measure.

10

5
5.1

Results on measuring FX liquidity

Results for high-frequency liquidity measures

Using the EBS data set over January 2007 May 2012, we estimate effective cost and
four alternative HF liquidity measures (bid-ask spread, price impact, return reversal, and
price dispersion) for each month and each exchange rate.
The full descriptive statistics are found in an internet appendix, but the following
are worth mentioning. First, average effective costs are smaller than average bid-ask
spreads, reflecting within-quote trading. Second, the average return reversal (temporary
price change accompanying order flow) is negative and the order flow price impact is
positive for all exchange rates. Third, comparing liquidity estimates across currencies,
we observe a substantial cross-sectional variation in which EUR/USD is the most liquid
exchange rate, while AUD/USD is the least liquid.
For the subsequent analysis we standardize each monthly HF liquidity measure for
each currency by subtracting the time-series mean and dividing by the standard deviation.
After the standardization process, we use the first principal component to construct acrosscurrencies liquidity measures (one for each method: EC, BA, PI, RR, and PD).
[Table 1 about here.]
The evidence in Table 1 indicate strong comovements among liquidity measures: the
lowest correlation of different across-currencies measures is 0.89. This means that all
these HF liquidity measures are very similar.
[Figure 2 about here.]
Looking at the dynamics of the HF effective cost in Figure 2 (dotted line, disregard
the other line for now), it is clear that liquidity is fairly persistent (autocorrelated). Liquidity was quite stable from January 2007 to mid 2008, followed by a substantial drop
in September 2008 to November 2008. The decline reflected the collapse of Lehman
Brothers together with the increased turmoil and uncertainty after the bankruptcy. Liquidity gradually recovered during 2009, but was still below the pre-crisis level at the end
of 2009. We observe a contraction of liquidity when the European sovereign debt crisis
intensified in early 2010. During the first half of 2012, liquidity was visibly improving,
being quite close to the pre-crisis level in May 2012.
11

5.2

Results for low-frequency liquidity measures

In this section, we identify the best low-frequency FX liquidity measuresdefined as the

ones with the highest correlation with the high-frequency benchmark. The aim is to give
guidance for the estimation of FX liquidity over a long time span and many currencies
(where only daily data is available) and to circumvent various other limitations imposed
by high-frequency data.
We use daily midquote, bid, ask, high, and low prices from Thomson Reuters on
the same nine currency pairs as above and over the same time period to compute eight
different LF liquidity measures. We compute the liquidity measures for each month and
for each exchange rate. The full descriptive statistics are found in an internet appendix,
but it can be noticed that the LF measures have much larger cross-sectional differences
than the HF measures.
Following the literature on evaluating the performance of LF liquidity measures (see
e.g. Goyenko, Holden, and Trzcinka (2009) Hasbrouck (2009), Corwin and Schultz
(2012), Marshall, Nguyen, and Visaltanachoti (2012)), we compare the LF liquidities
with the effective cost computed from the high-frequency EBS data. Given the very high
correlation between the HF liquidity measures (as demonstrated above), the choice of HF
benchmark is not crucial.
[Table 2 about here.]
Table 2 reports the times-series correlations of each LF liquidity measure for each
exchange rate with their respective HF effective cost benchmark. Boldfaced numbers
are different from zero at the 5% significance level.12 The Volatility measure has the
highest average (across exchange rates) correlation at 0.81, followed by the CS and Gibbs
measures with 0.71 and 0.70 average correlations. Notice also that, for each individual
exchange rate, the correlation coefficients between these three best measures and the HF
benchmark is always above 0.51 (the lowest value is CS for the EUR/USD). Among the
other measures, LOT has a mild average correlation at 0.43. The Roll, BPW, and EffTick
show poor performance, having average correlations with the effective cost measures of
0.30, 0.10, and 0.06, respectively.
To confirm the findings from individual exchange rates, we now consider the evidence
for across-currencies measures. That is, for each standardized LF liquidity measure, we
12

We apply a GMM based test using a Newey-West covariance estimator with 4 lags.

12

calculate the first principal component across exchange rates. We compare these LF measures with the HF across-currencies effective cost (the first principal component across
currencies of the effective cost).
[Table 3 about here.]
Table 3 shows how the LF liquidities correlate with the across-currencies effective
cost (EC). For the full sample (January 2007 to May 2012), shown on top, the findings
are similar to those for individual currencies: the CS, Gibbs and Volatility measures outperform the other measures.
To study the consistency of performance across time, we break the time-series correlations down by sub-periods in the rest of Table 3. Specifically, we compute time-series
correlations for three sub-periods: the pre-Lehman period, the Lehman bankruptcy and
the successive turmoil, and finally, the European sovereign debt crisis. Despite the limited
number of observations (only 18 months in each of the first two sub-periods) which cautions against drawing strong conclusions, some patterns are clear. In particular, the BPW
and EffTick measures both perform poorly at the peak of the U.S. financial crisis. Thus,
a weakness of these two measures is that their estimates of FX liquidity can severely be
biased by market conditions. In contrast, the CS, Gibbs and Volatility measures (once
again) perform well in all three sub-periods (the correlation with the HF benchmark is
always above 0.76).
To summarize, Tables 23 suggest that some of the LF liquidity measures (CS, Gibbs,
and Volatility) provide accurate proxies of the HF benchmark. The other LF measures
have low and/or unstable correlations with the HF benchmark.
The previous evidence suggests that some LF measures perform worse on the FX market than on the stock and bond markets (see e.g. Goyenko, Holden, and Trzcinka (2009)).
One reason for the poor performance of the Roll measure can be that the FX market is
inherently more liquid. In this regard, Harris (1990) points to significant deterioration of
the Roll estimator performance when the spread gets smaller (i.e. for more liquid stocks).
Another problem could be due to the use of indicative quotes rather than actual transaction prices, as it is the case for FX data. Being estimated from daily midquote prices
rather than transaction prices, the Roll measure may underestimate the transaction costs.
The BPW measure, originally designed for corporate bond liquidity, may suffer for the
same reasons. The indicative quotes probably affect also the BA. In addition, the timing
13

(21.00 GMT) of the daily bid-ask spread seems to lead to a noisy and unrepresentative
measure of the transaction costs.13 Finally, the poor performance of the EffTick measure
as a proxy of FX liquidity may be due to the specific characteristics of the FX data. In
fact, the number of digits after the point in daily bid and ask quotes can deviate from 1 to
5 during a single month, distorting the EffTick estimates.
To sum up, we provide evidence that the CS, Gibbs, and Volatility measures give
the best proxies of the HF liquidity benchmark on the FX market. This conclusion is
substantiated by the comparison between LF and HF measures, by consistent time-series
patterns and by cross-sectional evaluations.
5.3

Quote-based measures

Trading volume data are not readily available for FX markets. A method to approximate
trading volume proposed in FX literature is the quote frequency, i.e. the number of quote
revisions over a given period (e.g. Melvin and Yin (2000)). In this section we apply this
method to extend the set of LF liquidity measures by three quote-based measures of price
impact, namely the liquidity measures proposed by Amihud (2002), Pstor and Stambaugh (2003) and the so-called Amivest measure from Cooper, Groth, and Avera (1985)
and Amihud, Mendelson, and Lauterbach (1997). These measures require daily number
of quote revisions, which are available only from January 2007. They are therefore not
useful for calculating LF measures for a long sample period (which is our main goal), but
of independent interest.
Table 4 shows correlations of the across-currencies quote based LF measures with the
HF effective cost benchmark. The Amihud performs relatively well: the correlation for
the entire sample (January 2007 to May 2012) is 0.82, and the correlation coefficient is
reasonably stable (0.65 to 0.92) across sub-periods. In contrast, the Amivest performs
only modestly well and is less consistent (with correlations ranging from -0.37 to -0.82).
The Pastor-Stambaugh measure is clearly the worst: it appears almost uncorrelated with
the HF effective cost.14
13

Thomson Reuters provides bid-ask quotes at 21:00 GMT based on the indicative data from the latest
contributor, while the EBS data contains the best transactable bid and ask prices. Daily snaps of the EBS
bid-ask at 21:00 GMT have weak correlations (0.040.28) with the Thomson Reuters daily bid-ask over
the sample Jan 2007May 2012, depending on the currency pair. The standard deviation of the Thomson
Reuters bid-ask for the highly liquid FX rates (EUR/USD, EUR/CHF, USD/JPY) is more than twice as
large as that from EBS.
14
We also analyzed the Zeros measure from Lesmond, Ogden, and Trzcinka (1999) and the FHT measure

14

[Table 4 about here.]

The poor performance of the Pastor-Stambaugh is probably explained by two facts: it
relies on a rough proxy of order flow (number of quote revisions signed by the direction
of return) and it uses the lagged (instead of the contemporaneous) order flow.
5.4

Systematic low-frequency liquidity over 20072012

We now construct a systematic (market wide) LF liquidity (see Korajczyk and Sadka
(2008)) by computing the first principal component across the nine exchange rates and
the three best LF liquidity measures (CS, Gibbs and Volatility).15 This is the solid line
in Figure 2, while the dotted line is the HF effective cost discussed before. Clearly, the
systematic LF liquidity and its HF benchmark share very similar patterns over the 65
months of our sample period: the correlation is 0.93.
[Table 5 about here.]
This evidence suggests that it is possible to measure systematic liquidity by combining
the best LF measures by a principal component approach. Using an unweighted average
instead of the first principal component gives very similar results (see robustness section
for more details). However, it is not obvious that any of these methods attach the best
weights to the different LF measuresin the sense of proxying for the HF measure as
well as possible. We therefore also consider a regression approach.
Table 5, column 1, shows the regression of the monthly HF effective cost on the
systematic LF liquidity. The coefficient is 0.93, highly significant and the coefficient of
determination (R2 ) is 0.86. Column 2 instead uses only LF volatility as the regressor
and it works equally well.
Columns 3 and 4 include also the other good LF measuresand that gives a small
improvement in the R2 (increases from 0.86 to 0.88). Given the high correlations between
the different LF liquidity measures (potential multicollinearity issues), we orthogonalize
the LF measures by applying rotating transformations before using them as regressors.
In column (3) we let the first transformed factor be Volatility, while the second factor is
from Fong, Holden, and Trzcinka (2011). However, we discarded them due to the almost complete absence
of daily zero returns.
15
First principal component explains 59% of the total variation. For details, see internet appendix.

15

the residuals from regressing the CS on the Volatility and the third factor represents the
residuals from regressing the Gibbs on the first two factors. In column (4), we switch the
order of the CS (now third) and Gibbs (now second). The results suggest that both CS and
Gibbs are useful.
Column (5) shows a specification based on only volatility and volatility interacted
with a dummy that is one when there was an increase in volatility last month, and zero
otherwise. This specification adds somewhat to the fit, but perhaps more interestingly, it
shows that the relation between the HF effective cost and volatility is somewhat weaker
when there has been a recent surge in volatility. Further nonlinear specifications give very
small improvements in fit and therefore not reported.
Overall, the regression results shed light on which HF measures that are most important for proxying the HF effective cost and that a regression can improve the fit somewhat.
However, it also shows that using the principal components approach is almost as good
as the regression based optimal weights. Since the principal component approach is
already well established in the literature (see eg. Korajczyk and Sadka (2008)), we will
henceforth rely on this.
5.5

Granularity of the LF measures

The previous analysis shows that some LF measures provide good proxies of the HF
effective cost on the monthly frequency. This section explores what happens at higher
frequencies than a month.
This exercise is possible for only four measures. We compute the LF Volatility and BA
on frequencies of 1 to 5 days as well as 1 to 4 weeks. In contrast, CS requires a minimum
of two consecutive days and the Gibbs estimator seems to need at least five days of data
to work.
[Figure 3 about here.]
Figure 3 plots the correlation of each of these four across-currencies LF measures
with the across-currencies HF effective cost benchmark for different frequencies. Two
findings emerge: first, as expected, the performance deteriorates at higher frequencies: the
correlations with the HF benchmark are 0.660.93 on the four-week frequency and only
0.470.70 on the two-day frequency. However, the overall performance is fairly good
down to the two-week frequencyand some of the measures (in particular, Volatility)
16

seem to perform reasonably well even on the two-day frequency. Second, the systematic
liquidity always provides the most precise technique to measure liquidity.
5.6

Systematic low-frequency liquidity over 19912012

High-frequency data is available only for a small number of exchange ratesand for
very recent time periods. This severely restricts the possibility to calculate HF liquidity
measures outside the major currencies and back in time. However, our previous analysis shows that it is possible to construct accurate liquidity proxies from low-frequency
(daily) data. We now demonstrate the usefulness of that by considering a larger panel of
exchange rates and by extending the sample period. The source of the LF data (Datastream Thomson Reuters) naturally defines the limits of the cross section and the length of
the time series, which are 40 exchange rates and more than 20 years (from January 1991
to May 2012).
We compute monthly times series 19912012 of the CS, Gibbs, and Volatility measures for each exchange rate. For each measure, we also calculate the across-currencies
measure (by the first principal component across the forty currency pairs). To create a
measure of systematic FX liquidity we calculate the first principal component across the
120 data series (40 currency pairs, 3 measures).
[Table 6 about here.]
Table 6 shows the correlation coefficients between the LF measures. All correlations
are very high, ranging from 0.81 to 0.97so these different measures capture virtually
the same time patterns.
Figure 4 shows the time series of the systematic liquidity measure. As references
chosen arbitrarily, we have also indicated some major (financial and geopolitical) crises.
While the turmoil around the Lehman bankruptcy caused the largest drop in systematic
liquidity, there are also a number of other significant events, for instance, the ERM crisis
(1992), the peso crisis (1994), the Russian default (1998) and 9/11 (2001). Looking at
further details shows that the reaction to stock market events is mixed. There is a decline
in FX liquidity after the October 1997 crash, perhaps some decline after the burst of the
dotcom bubble (spring 2000) but very little response to the Enron scandal (Dec 2001).
In addition, the systematic FX liquidity has a correlation of 0.67 with the VIX and only
0.51 with the TED spread. Overall, FX liquidity seems to share some time series patterns
17

with other asset markets, but also contains some features that are not directly reflected
by the stock market or measures of funding liquidity (TED spread). These preliminary
findings motivate an in-depth understanding of the main drivers of FX liquidity that will
be conducted in the next sessions.
[Figure 4 about here.]
5.7

Robustness checks

In this section, we briefly describe the main robustness checks and additional analysis.
Further details are reported in an internet appendix.
First, we replicated our analysis by using other HF benchmarks than the HF effective
cost. Overall, we obtain very similar results. Given the very high correlation between the
HF liquidity measures (see Table 1), the choice of benchmark is not important.
Second, we changed the details of how the methods are implementedand our main
results are almost unchanged. For instance, in the Gibbs sampler, using a higher number
of sweeps (up to 10000) or changing the prior of the transaction cost does not affect the
mean parameter estimates materially. However, there are two exceptions to this finding:
(a) setting the standard deviation of the prior to a very small value (eg. 0.001) gives estimates that are much less correlated with the HF benchmark; (b) when we study liquidity
on a weekly instead of the monthly frequency, then the prior becomes more important.
(The latter confirms the evidence in Hasbrouck (2009).) Similarly, in the LOT measure
we replaced the effective exchange rate from the Fed with a simple average change in the
dollar versus all the other currencies in the same spirit of the dollar factor (see Lustig
and Verdelhan (2007)). The resulting LOT estimates have somewhat lower correlations
with the effective cost benchmark.
Third, we have replaced the principal component analysis with straight or trimmed
averages across currencies and/or liquidity measures. This has very small effects on our
results, since the first principal component typically loads more or less equally on the
currencies/measures. However, there is one exception to this finding: some of the acrosscurrencies LF measures (for instance, in Table 3) have unequal (and even negative) loadings on the different exchange rates. This affects mostly the BPW and EffTick measures.
When using a straight (or trimmed) average, these measures tend to perform even worse.

18

Fourth, we assessed the correlations of changes instead of levels for the different liquidity measures. Similarly to the analysis on levels, the CS, Gibbs and Volatility perform
better than the other LF measures in terms of correlations with the HF effective cost
benchmark.
Fifth, for the long sample 1991-2012, we also investigated the effect of using just the
9 main currencies instead of the full cross-section of 40 currencies. The results are very
similar. For instance, the systematic liquidity measure from the 9 and the 40 currencies
have a correlation of 0.97.
Finally, we found very similar results to those reported in Table 5 when we regress the
across-currencies EC on LF liquidities using the quantile regression technique. Additionally, we found that the orthogonalized liquidity measures have significant coefficients in
mid-quantiles, i.e. not when liquidity is extremely low or high.

Understanding FX liquidity

In the previous section, we showed that it is possible to accurately measure FX liquidity

using low-frequency data. In this section, we try to understand FX liquidity by analyzing
the commonality of FX liquidities and by relating FX liquidity to its possible drivers. We
proceed in three steps: first, we study commonality in FX liquidity. Second, we regress
FX systematic liquidity on returns, risk proxies and liquidites of the main asset classes.
Finally, we extended this analysis to individual exchange rates. In most of our analysis, we
take into separate consideration the few pegged currencies in our sample since a pegged
exchange rate means that the central bank steps in as a liquidity provider.
6.1

Commonality in FX liquidity

Commonality in liquidity has been extensively analyzed in stock and bond markets (e.g.
Chordia, Roll, and Subrahmanyam (2000), Hasbrouck and Seppi (2001), Chordia, Sarkar,
and Subrahmanyam (2005), Korajczyk and Sadka (2008) and Karolyi, Lee, and Dijk
(2012)). However, to our knowledge only two papers investigate commonality of FX liquidity. Mancini, Ranaldo, and Wrampelmeyer (2012) use HF data to study FX commonality of nine exchange rates during the recent financial crisis of 2007-9. Banti, Phylaktis,
and Sarno (2012) use the institutional customer data provided by State Street Corporation
to approximate the market order flow of 14 exchange rates over a period of 14 years and of
19

six additional exchange rates over a shorter period. Here, we extend the FX literature by
investigating FX commonality across a long period (1991-2012) and a large cross-section
(40 currencies). This allows us to identify different patterns for developed and emerging
currencies as well as the asymmetries of up- and down-markets.
We extend the analysis of commonality in FX liquidities following Chordia et al.
(2000). We regress the changes of currency pair liquidity measures on changes of FX
systematic liquidity
4Lj;t D j C j 4LM;t C "j;t
(7)
where 4Lj;t is, for FX rate j , the change from month t 1 to t in individual FX
rate liquidity (obtained from the PCA across the three best LF liquidity proxies), and
4LM;t is the concurrent change in the systematic LF liquidity. We run the regressions
over 257 months, Jan 1991 - May 2012. All estimated slope coefficients are positive and
statistically significant at any conventional level.16
[Figure 5 about here.]
As in Karolyi, Lee, and Dijk (2012), we use the R-square as an indicator of commonality in liquidity. Figure 5 shows the R2 for 40 currencies organized into three groups: (1)
developed and much traded exchange rates (based on market share of FX market turnover
by currency pair resulting from the Bank of International Settlements (2013)), (2) developed and less traded exchange rates and (3) emerging currencies. Solid black bars are for
currencies that were not pegged at any time during our sample, shaded bars for currencies
that were pegged for at least some time.
The figure has three main messages. First, commonality in FX liquidity is strong.
The average R-square across our sample of 40 currencies is 36%. Only seven exchange
rates have an R-square lower than 10% (several of which involved pegged currencies),
suggesting that liquidity co-moves for the vast majority of the currencies. This implies
that there are periods when the entire FX market is systematically illiquid or liquid.
Second, commonality of the FX market is stronger than that found in the stock market
literature. Several papers find significant co-movement of liquidity in cross-sections of
U.S. stocks (e.g. Datar, Naik, and Radcliffe (1998), Chordia, Roll, and Subrahmanyam
16

Excluding exchange rate j in the computation of 4LM;t or including one lead and one lag of the
systematic LF liquidity as additional regressors (i.e. 4LM;tC1 and 4LM;t 1 ) does not affect the results
materially, see internet appendix for details.

20

(2000), Chordia, Roll, and Subrahmanyam (2000), Hasbrouck and Seppi (2001), Huberman and Halka (2001), A. (2005)). Karolyi, Lee, and Dijk (2012) show that commonality is also discernible across international stock markets. Our analysis suggests that
comovement in liquidity is even more pervasive than previously documented for stocks
(for instance, Korajczyk and Sadka (2008) find adjusted R2 values ranging from 4% to
26%).
Third, our findings indicate that FX commonality is stronger for developed currencies
2
(R values of around 45% compared to around 20%). This holds also if we compare
the emerging currencies with those developed currencies that are relatively less traded
(according to the BIS turnover data; see the middle group in the figure). Also, within
the group of developed and liquid currencies (first group) there seem to be no relation
between the more trading volume and commonality.
[Figure 6 about here.]
Figure 6 illustrates how the degree of commonality (for floating currencies) has changed
across different time periods. Emerging currencies have lower commonality than developed currencies across all sub-periods, but they seem to be catching up. Since mid-2008
their average R2 is 28%, compared with just 19% during the second half of the 1990s
(when the Asian crisis drove down the liquidity for several of the emerging currencies in
our cross-section).
[Table 7 about here.]
In the spirit of Hameed, Kang, and Viswanathan (2010), we test whether commonality in the FX market liquidity increases in distressed markets, associated with the drop
in liquidity and tighter funding constraints. Specifically, we run the panel regression of
individual FX rate liquidities on the FX systematic liquidity as well as the FX systematic
liquidity interacted with a dummy for severely distressed markets.17 Table 7 provides the
evidence of significantly stronger FX market commonality in the periods of high volatility in FX, interest rate, stock markets as well as tighter funding conditions and sharp
depreciation of exchange rates against the U.S. dollar.
17

As in Hameed, Kang, and Viswanathan (2010), the dummy takes one if and only if the risk factor at
time t 1 is more than 1.5 standard deviations above its unconditional mean

21

6.2

Explaining FX systematic liquidity

In this section, we try to identify some possible drivers of FX liquidity. The market
microstructure literature suggests various frictions which may cause low liquidity, including participation and transaction costs, asymmetric information, imperfect competition,
funding constraints and search costs. These frictions may be particularly relevant in a decentralized and opaque trading environment like the FX market.18 These issues translate
into several forms of risk (e.g. inventory and asymmetric information risks),19 portfolio
rebalancing and delegation that may affect time-variation and cross-sectional differences
in FX liquidity.
One of the main tenets in FX literature is the parity condition, and that arbitrage
trades push prices between two similar assets denominated in different currencies towards
parity. This applies to fixed-income securities (e.g. covered and uncovered interest rate
parity) and stocks (e.g. uncovered equity parity, as in Hau and Rey (2006)). No matter
how trading strategies that exploit deviations from the parity condition are implemented,
cross-market linkages between return and FX trading are likely to arise.
Market liquidity should also relate to risk. For instance, in flight-to-quality and flightto-liquidity scenarios investors rebalance their portfolios toward less risky and more liquid securities (e.g. Beber, Brandt, and Kavajecz (2009)). A recent strand of the literature
sheds light on the intricate dynamics between market liquidity, funding constraints and
risk (e.g. Vayanos and Gromb (2002), Morris and Shin (2004), Vayanos (2004), Brunnermeier and Pedersen (2009), Garleanu and Pedersen (2007), Acharya and Viswanathan
(2011)). While the exact mechanisms in the theoretical models above differ, they all predict that funding constraints and market illiquidity can generate spirals through fire-sales
and increased risk.20 This mechanism can spill over across various asset classes including
FX markets, creating contagion and commonality in illiquidity (e.g. Xiong (2001) and
Kyle and Xiong (2001)).
[Table 8 about here.]
18

See Vayanos and Wang (2012) for excellent survey of the literature on market liquidity and Lyons
(2001) for specific issues on FX microstructure.
19
Inventory and the asymmetric information effects are documented in several papers, e.g. Lyons (2001)
and Bjnnes and Rime (2005).
20
The main idea behind these models is that large price fluctuations increase the demand for liquidity as
agents liquidate their positions across many assets and reduce the supply of liquidity as liquidity providers
hit their wealth or funding constraints.

22

On the one hand, the parity condition principle suggests that FX liquidity can be related to returns of FX and other assets such as bonds and stocks. On the other hand, the
liquidity spirals theory implies a link between market illiquidity, risk and funding constraints. Below, we analyze whether FX liquidity is linked to returns and risk variables
of the main asset classes, i.e. stocks, government and corporate bonds and FX. It should
be kept in mind, however, that we make no attempts to control endogeneity and reverse
causality, which may limit the economic interpretation of the analysis. We proceed in
three steps: First, we construct a large dataset of monthly returns on FX markets, US
and global equity/corporate/government bond markets, money market rates and central
bank rates. Similarly, we consider several risk measures for each asset class. The list
of these variables is available in the internet appendix. Second, we regress (changes of)
FX systematic liquidity on each individual variable to identify the most significant variables within each asset class. Detailed results are reported in the internet appendix. The
main idea is to isolate some possible global factors linked to FX liquidity. Third and
finally, we estimate various encompassing models that include representative variables
for the risk, return and liquidity of each asset class. Table 8 summarizes the main results.
The regression models (1)-(4), (5)-(8) and (9)-(12) refer to the (changes of) FX systematic liquidity including all (floating) 32 currencies, developed currencies and emerging
currencies, respectively.
Some clear patterns emerge. First, we can explain much of the variation in FX systematic liquidity. The R2 values for the FX systematic liquidity for the 32 floating currencies
are above 50% in several specifications. The separate analysis of (floating) developed and
emerging currencies suggest that the global factors explain developed currencies better
than the emerging currencies (higher R2 values).
Second, the risk variables are more important than the return variables. A Wald test
easily rejects the null hypothesis that the estimated coefficients of all risk variables are
equal to zero. The coefficients of the risk variables have (with very few exceptions) negative signs, indicating that FX liquidity decreases with an increase of risk in each asset
classes. In most specifications, the risk variables of bond and stock markets are significant
(t-stats in brackets). This holds also when variables from the FX market are included. In
addition, that FX liquidity of developed currencies is negatively related to the TED spread.
Other measures of funding strains such as the Libor-OIS confirm the same result (see internet appendix). It is also worth noting that we replicated our analysis for all EUR and
23

GBP currency pairs. The results obtained taken the EUR and GBP as base currency are
exactly in line with the findings reported here when the U.S. dollar is the base currency
(see internet appendix). In general, our findings suggest that flight-to-liquidity dynamics
and liquidity spirals theory explain better FX liquidity patterns. On the other hand, the
parity condition theory, at least in its original risk-neutral framework, provides a weaker
explanation for time-varying FX liquidity.
Third, we find significant commonality in liquidity between FX, stock and bond markets (see columns (3), (7) and (11) of Table 8). This finding extends the previous literature
by showing that FX-stock-bonds commonality holds for both developed and emerging
currencies. However, the importance of the stock liquidity is overshadowed by the other
variables (see columns (4), (8) and (12)) and the risk factors remain significant when
we control for stock and bond liquidity.
6.3

Explaining FX currency-pair liquidities

This section extends the analysis in the previous section by studying the FX liquidity of
individual exchange rates. We are particularly interested in whether the exposure to the
global factors depends on the risk characteristics of the currency.
[Table 9 about here.]
The recent FX asset pricing literature shows that various types of risks are associated
with FX excess returns. In the spirit of the factor model in Fama and French (1993),
Lustig, Roussanov, and Verdelhan (2011) find that two risk factors can explain most of the
variation in monthly carry trade returns. These factors are the U.S. dollar average currency
return (denoted FX return risk thereafter) and the carry trade risk factor (denoted carry
trade risk), given by a currency portfolio that is long in high interest rate currencies and
short in low interest rate currencies. Menkhoff, Sarno, Schmeling, and Schrimpf (2012a)
show that volatility risk supplements the FX return and carry trade risk factors. Mancini,
Ranaldo, and Wrampelmeyer (2012) illustrate that a liquidity risk factor also has a
strong impact on carry trade returns. Motivated by these papers, we construct regression
models referring to each one of the four risk categories discussed. We perform fixed-effect
panel regressions in which (changes of) the liquidities of individual exchange rates are
regressed on the global factors, interacted with dummies that represent the risk categories.

24

The t-stats of the coefficients are robust to cross-sectional correlations, using the Driscoll
and Kraay (1998) covariance estimator. Table 9 presents the main findings.
As a validation of the panel approach, column 1 of Table 9 performs almost the same
analysis as previously in Table 8, where the dependent variable was the change of the
systematic liquidity for the floating currencies. However, there are two differences. First,
the dependent variable is now a panel of currency-specific liquidities. Second, Table 9
applies a time-varying definition of whether a currency is floating or pegged. (In practice,
this is done by interacting all global factors with a time-varying floating dummy and
also with another pegged dummy. The results for the latter are not reported.) Not
surprisingly, the coefficients from the panel regression are in line with those found for the
FX systematic liquidity: the same signs and the same degree of statistical significance as
in Table 8.21 However, the R-square is reduced to 0.12, since the panel contains much
more idiosyncratic noise than the systematic liquidity.
The remaining columns in Table 9 introduce some specific dummy variables aimed
at capturing risky currencies. Each specification is based in column (1), but adds a new
dummy variable interacted with the global factors. For instance, the new dummy in column (2) in Table 9 is equal to one if a currency pair underperforms the cross-sectional
average U.S. dollar return in that month (and the currency is floating). We interpret this
dummy as capturing general FX return risk.22 Hence, the new regression coefficients
measure the extra exposure to the global factors for currencies that bear some FX return
risk (and are floating).
In column (3) of Table 9, we instead use a carry trade risk dummy which is one if a
currency pair has a forward premium (difference between monthly forward and current
spot rate) higher than the cross-sectional average in that month (and the currency is floating).23 In column (4), we use a volatility risk dummy which is equal to one if a currency
pair has a higher realized volatility than the cross-sectional average in that month (and
is floating). Volatility is measured as the monthly squared return. Finally, in column
(5), liquidity risk is captured by a dummy variable equal to one if an exchange rate has
21

The magnitude of the coefficients differs a bit compared to Table 8 since the various exchange rates
are here given a different weighting than according to the principal component that defines the systematic
liquidity.
22
Conceptually, this variable can also be related to momentum strategies in FX markets, recently studied by e.g. Asness, Moskowitz, and Pedersen (2012), Burnside, Eichenbaum, and Rebelo (2011), and
Menkhoff, Sarno, Schmeling, and Schrimpf (2012b).
23
We exclude from the panel the observations, for which monthly forward data is not available.

25

stronger commonality (in terms of R2 as in Figure 5) in FX liquidity than the sample

average (and is floating). This last dummy variable is (in contrast to the other dummies)
not time-varying.
The main result in Table 9 is that riskier currencies are more exposed to FX market liquidity drops. This pattern materializes in three ways. First, an increase in stock volatility
and in default spreads is associated with more severe liquidity drops for those exchange
rates that depreciate more against the U.S. dollar (column 2) and for those exchange rates
with large volatility increases (column 4). Hence, the FX return risk and volatility risk
strengthen the effects of the stock market and corporate bond risks. Second, the liquidity
of those currencies more exposed to the carry trade risk deteriorates more with an increase of corporate bonds yields (column 3). Third, the liquidity risk appears to be more
discernible in terms of funding liquidity risk, that is, as the TED spread increases (column
5), the liquidity tends to evaporate more for those currencies with stronger commonality
in FX liquidity. Overall, these findings confirm that currency-pair liquidities and not only
FX liquidity are related to global risk factors. Moreover, the exchange rates that bear
larger risk premiums are more exposed to liquidity drops.

Concluding Remarks

This paper provides evidence that liquidity measures based on low-frequency (LF) data
can reliably measure liquidity on the foreign exchange (FX) market. To do this, we compare LF measures based on readily available data to high-frequency (HF) measures based
on data that are highly sophisticated but very limited and difficult to access.
We perform a comparative analysis between LF and HF measures using nine currency
pairs that roughly captures three quarters of the daily average FX trading volume. Our
sample period spans from January 2007 to May 2012, which includes a pre-crisis phase
and the most recent financial turmoil. Comparing the monthly time series of eight LF
liquidity measures to the HF effective cost (our benchmark), we find that three measures
perform particularly well, namely CS (from Corwin and Schultz (2012)), Gibbs (from
Hasbrouck (2009)), and Volatility. These liquidities measures have correlations of around
0.90 with the HF effective cost benchmark. Two other measures, the LOT measure from
Lesmond, Ogden, and Trzcinka (1999) and the BA spread, do a worse, but still reasonably
good job. In contrast, the Roll from Roll (1984), BPW from Bao, Pan, and Wang (2011)
26

and EffTick from Holden (2009) are much less effective in gauging FX liquidity. We then
combine the best LF measures for all currency pairs to construct an index of systematic
FX liquidity. This index has a 0.93 correlation with the HF effective cost benchmark. This
is evidence of that FX liquidity can be measured on the basis of readily available (daily)
data and fairly simple methods.
In order to document the long-term pattern of FX liquidity, we compute the systematic
LF liquidity index from 1991 across forty currency pairs. First, we analyze commonality
in FX liquidities. Our results indicate strong commonality, especially for developed currencies and in highly volatile markets. Our findings also suggest that FX commonality is
more pronounced than on stock markets and that FX liquidity of developed and emerging currencies is positively related to stock and bond market liquidity. Second, our study
suggests that a substantial part of the common variation in currency liquidity is due to
risk. FX illiquidity is tied to risk variables of the main asset markets consistent with the
liquidity spirals theory and more in general, with flight-to-quality and flight-to-liquidity
phenomena. Cross-sectionally, exchange rates bearing larger risk premiums identified by
the recent FX asset pricing literature tend to be more exposed to liquidity drops.
Our findings are relevant for investors, policymakers and researchers. First, investors
are interested in returns net of transaction costs. The liquidity measures analyzed in this
study should help estimate transaction costs in FX markets. Second, for market participants the recent financial crisis has proved that liquidity can suddenly evaporate even on
the FX market. More generally, our results suggest other channel of risk spillovers, i.e.
from risk intensification in one market to illiquidity in another (the FX market, in this
case). Third, liquidity issues dominate the agenda of policymakers, see e.g. the liquidity requirements in Basel III. Fourth and finally, researchers try to shed light on intricate
market mechanisms, including the spiral dynamics between market liquidity and funding
liquidity. All this calls for reliable methods and accessible data to gauge FX liquidity and
in-depth understanding of liquidity issues on currency markets.

27

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34

Black Wednesday, Sep 1992

1.5

Month before the event

Endevent month
Endnext month
Endsecond next month

0.5

AUD/USD ECU/CHF ECU/GBP ECU/JPY DEM/USD GBP/USD USD/CAD USD/CHF USD/JPY

Lehman collapse, Sep 2008

Month before the event
Endevent month
Endnext month
Endsecond next month

AUD/USD EUR/CHF EUR/GBP EUR/JPY EUR/USD GBP/USD USD/CAD USD/CHF USD/JPY

Figure 1: Effect of the crisis events on the estimated EC. Figure depicts the monthly estimated EC (in basis points) for 9 exchange rates before and after two crisis events: the
Black Wednesday on 16 September 1992 and Lehman collapse on 15 September 2008.
The estimated Effective Cost (EC) for FX rate i is calculated from ECiest D C Li ,
where Li is the low-frequency currency pair liquidity (i D 1:::9), and are taken
from regressions ECi D C Li C ", performed over 2007 - 2012 with the actual highfrequency EC as the dependent variable. The R2 values from these nine regressions range
from 46% to 82% and are on average 66%. The low-frequency currency pair liquidity is
obtained from the PCA across three best LF liquidity proxies (CS, Gibbs and Volatility).

35

4
01/07

07/07

01/08

08/08

02/09

08/09

03/10

09/10

04/11

10/11

04/12

Figure 2: Across-currencies effective cost (HF) vs. systematic low-frequency (LF) liquidity.
The across-currencies effective cost liquidity is obtained from the PCA across exchange
rates (dotted line). The systematic LF liquidity is obtained from the PCA across exchange
rates as well as three best LF liquidity measures (CS, Gibbs and Volatility). Both measures
are standardized. The sign of each liquidity measure is adjusted such that the measure
represents liquidity rather than illiquidity. The sample is January 2007 May 2012, 65
months.

36

Correlation coefficient

0.9

0.8

0.7

0.6

CS
Gibbs
Volatility
BA
Systematic liquidity

0.5

0.4
0

8
10
12
14
Frequency (number of working days)

16

18

20

Figure 3: Low-frequency (LF) liquidity measures based on different frequencies vs effective

cost liquidity. Each line represents the correlations of the LF liquidity measures based on
different frequencies with the effective cost benchmark. Whenever it is possible, each
liquidity measure is computed for one, two, three days and for one, two and four weeks.
LF liquidity measures include across-currencies CS, Gibbs, Volatility, BA, and systematic
LF liquidity. The systematic LF liquidity is based on the PCA across the FX rates as well
as across the best LF measures available at each frequency (Volatility and BA on oneday; Volatility, CS and BA on two- and three-day; Volatility, Gibbs and CS from five-day
frequency up). The sample is January 2007 May 2012.

37

2
1
0
1
2
3
4

Asian
crisis

Black
Wednesday

5
6
1991

Tequila
peso
crisis

1994

"Liquidity"
crisis
9/11

Russian
crisis

1997

Sovereign
crisis

Financial
crisis

2000

2003

2006

2009

2012

Figure 4: Systematic low-frequency (LF) FX liquidity over 19912012. Figure depicts the
monthly standardized systematic LF liquidity obtained from the PCA across the 40 exchange rates as well as three best LF liquidity proxies (CS, Gibbs and Volatility). The
sign of each liquidity measure is adjusted such that the measure represents liquidity rather
than illiquidity. The dotted lines denote the dates of financial and geopolitical crises over
19912012. The sample is January 1991 May 2012, 257 months.

38

0.8
0.7

Floating, developed and liquid

mean R2 = 0.45

Floating, developed and less liquid

mean R2 = 0.43

Pegged and emerging Floating and emerging

mean R2 = 0.37
mean R2 = 0.18

0.6
0.5
0.4
0.3
0.2

EUR/USD
JPY/USD
GBP/USD
AUD/USD
CAD/USD
CHF/USD
JPY/EUR
GBP/EUR
CHF/EUR
SEK/USD
CAD/EUR
AUD/EUR
DKK/USD
DKK/GBP
AUD/GBP
CAD/GBP
CHF/GBP
JPY/GBP
NOK/EUR
NOK/GBP
NOK/USD
NZD/EUR
NZD/GBP
NZD/USD
SEK/USD
HKD/USD
MYR/USD
HKD/EUR
HKD/GBP
MYR/GBP
TRY/GBP
INR/USD
KRW/USD
MXN/USD
SGD/EUR
SGD/GBP
SGD/USD
TWD/USD
ZAR/GBP
ZAR/USD

0.1

Figure 5: Commonality in the FX liquidity for each currency pair. The Figure shows the R2
from regressing individual FX liquidities on the systematic LF liquidity. The individual
FX rate liquidities are obtained from the PCA across the three best LF liquidity proxies
(CS, Gibbs and Volatility) for each currency pair. The systematic LF liquidity is obtained
from the PCA across the 40 exchange rates as well as the three best LF liquidity proxies.
For each exchange rate, its liquidity is regressed on the systematic LF liquidity. Each
bar represents the R2 from these regressions. The exchange rates in the developed and
liquid group are sorted according to their FX market turnover in April 2010 (Bank of
International Settlements (2013)), starting from the highest turnover (on the left). The
exchange rates in all the other groups are sorted alphabetically. White bars denote the
pegged currency pairs. Grey bars denote the currency pairs, where one currency in a pair
is pegged to the currency outside the pair. The sample is January 1991 May 2012, 257
months.

39

0.5

All currencies
Developed
Emerging

0.4

0.3

0.2

0.1

0
Whole period,
Jan 1991 May 2012

PreEuro,
Jan 1991 Dec 1998

AfterEuro,
Jan 1999 Jun 2008

Financial crisis,
Jul 2008 May 2012

Figure 6: Commonality in the FX liquidity by groups and sub-periods. The Figure shows
the average R2 from regressing individual FX liquidities on the systematic LF liquidity
for different groups of non-pegged currencies and for different periods. The groups of
(floating) currencies are: all 32 currencies, 23 developed and 9 emerging. The periods
are: whole period (Jan 1991 - May 2012), pre-Euro (Jan 1991 - Dec 1998), after-Euro
(Jan 1999 - Jun 2008) and financial crisis (Jul 2008 - May 2012). The individual FX
rate liquidities are obtained from the PCA across the three best LF liquidity proxies (CS,
Gibbs and Volatility) for each currency pair. The systematic LF liquidity is obtained from
the PCA across the 40 exchange rates as well as the three best LF liquidity proxies. The
sample is January 1991 May 2012, 257 months.

40

EC
Effective cost
1
Bid-ask
0.985
Price impact
0.963
Return reversal -0.939
Price dispersion 0.940

BA
1
0.946
-0.951
0.947

PI

RR

1
-0.917
1
0.898 -0.937

PD

Table 1: Correlations between the across-currencies high-frequency (HF) liquidity measures. The table shows correlations between the across-currencies effective cost (EC),
bid-ask spread (BA), price impact (PI), return reversal (RR), and price dispersion (PD).
The across-currencies EC, BA, PI, RR, and PD are computed from the PCA (within measures) across individual FX rate liquidities. Bold numbers are statistically significant at
the 5% level. The significance test is the GMM based test using a Newey and West (1987)
covariance estimator with 4 lags. Correlations are computed using 65 non-overlapping
monthly observations. The sample is January 2007 May 2012.

41

Roll
AUD/USD
EUR/CHF
EUR/GBP
EUR/JPY
EUR/USD
GBP/USD
USD/CAD
USD/CHF
USD/JPY
Average

0.678
0.425
0.156
0.543
0.234
-0.013
-0.008
0.280
0.423
0.302

BPW
0.597
0.170
-0.353
0.525
0.073
-0.501
-0.017
0.035
0.400
0.103

BA

CS

0.540
0.505
0.745
0.750
0.477
0.725
0.254
0.520
0.413
0.548

0.852
0.780
0.754
0.687
0.510
0.818
0.628
0.609
0.746
0.709

Gibbs
0.812
0.790
0.623
0.673
0.600
0.747
0.616
0.756
0.643
0.695

Volatility EffTick LOT

0.851
0.848
0.867
0.729
0.712
0.929
0.710
0.874
0.759
0.809

0.284
0.199
0.093
-0.034
0.020
0.142
0.037
0.014
-0.224
0.059

0.629
0.381
0.214
0.581
0.347
0.595
0.213
0.443
0.431
0.426

Table 2: Correlations between the FX rate LF liquidities and the EC. The table
shows the time-series correlations of the eight low-frequency liquidity measures for each
exchange rate with the effective cost measure for the same exchange rate. Effective cost
denotes the monthly average of daily effective cost estimates. The monthly low-frequency
spread proxies are: Roll from Roll from Roll (1984), BA is the relative bid-ask spread,
BPW from Bao, Pan, and Wang (2011), CS from Corwin and Schultz (2012), Gibbs from
Hasbrouck (2009), Volatility, EffTick from Holden (2009), and LOT from Lesmond, Ogden, and Trzcinka (1999). Bold numbers are statistically significant at the 5% level (GMM
based test using a Newey-West covariance estimator with 4 lags). The sample is January
2007 May 2012, 65 months.

42

Roll

BPW

BA

CS

Gibbs

Volatility

EffTick

Whole sample (Jan 2007 - May 2012), 65 months

0.584 0.555 0.663 0.896 0.890
0.930
0.023
Pre-crisis (Jan 2007 - Jun 2008), 18 months
0.493 0.282 0.704 0.838 0.761
0.887
-0.156
Financial crisis (Jul 2008 - Dec 2009), 18 months
0.568 0.591 0.818 0.902 0.900
0.935
0.072
European sovereign debt crisis (Jan 2010 - May 2012), 29 months
0.445 0.110 0.390 0.826 0.763
0.783
0.086

LOT
0.612
0.066
0.702
0.139

Table 3: Correlations between the across-currencies LF liquidities and the EC. The
table shows times-series correlations between the across-currencies LF liquidities and
the across-currencies effective cost over the whole period and over three subperiods:
pre-crisis (Jan 2007 June 2008), financial crisis (Jul 2008 Dec 2009) and European
sovereign debt crisis (Jan 2010 May 2012). The monthly low-frequency spread proxies are: Roll from Roll (1984), BA is the relative bid-ask spread, BPW from Bao, Pan,
and Wang (2011), CS from Corwin and Schultz (2012), Gibbs from Hasbrouck (2009),
Volatility, EffTick from Holden (2009), and LOT from Lesmond, Ogden, and Trzcinka
(1999). The across-currencies measures are based on the PCA (within measures) across
individual FX rate liquidites. Bold numbers are statistically significant at the 5% level
(GMM based test using a Newey and West (1987) covariance estimator with 4 lags). The
sample is January 2007 May 2012, 65 months.

43

Amihud

Amivest

PastorStambaugh

Whole sample (Jan 2007 - May 2012), 65 months

0.815
-0.502
-0.144
Pre-crisis (Jan 2007 - Jun 2008), 18 months
0.652
-0.371
0.001
Financial crisis (Jul 2008 - Dec 2009), 18 months
0.916
-0.825
-0.297
European sovereign debt crisis (Jan 2010 - May 2012), 29 months
0.797
-0.770
-0.032
Table 4: Correlations between the across-currencies quote-based LF liquidities and
the EC. The table shows the time-series correlations of the across-currencies quotebased LF measures with the across-currencies effective cost over the whole period and
over three subperiods: pre-crisis (Jan 2007 - Jun 2008), financial crisis (Jul 2008 - Dec
2009) and European sovereign debt crisis (Jan 2010 - May 2012). The monthly quotebased low-frequency spread proxies are: Amihud from Amihud (2002), Amivest from
Cooper, Groth, and Avera (1985) and Amihud, Mendelson, and Lauterbach (1997), and
Pastor-Stambaugh from Pstor and Stambaugh (2003). The across-currencies measures
are based on the PCA (within measures) across the individual FX rate liquiditites. Bold
numbers are statistically significant at the 5% level. The sample is January 2007 - May
2012, 65 months.

44

(1)
LF liquidity

(2)

(3)

(4)

(5)

0.930
[20.092]

0.930
[21.059]

0.930
[21.059]

1.049
[15.124]
-0.207
[-2.214]

0.929
[19.950]

Volatility
Volatility
dummy
CS

0.253
[2.187]
0.204
[1.851]

Gibbs
GibbsC
CSCC
R2

0.863

0.865

0.881

0.245
[2.275]
0.206
[1.742]
0.881

0.872

Table 5: Regressions of the across-currencies EC on the LF liquidities. The table shows

the output of the regression of the across-currencies effective cost on (1) the systematic
LF liquidity, obtained from the PCA across FX rates as well as best LF liquidities, (2)
the across-currencies volatility, (3)-(4) the rotated best across-currencies low-frequency
measures, (5) the across-currencies volatility and the latter interacted with the dummy,
which takes 1, if there was an increase in volatility (illiquidity) one month before, zero
otherwise. The best across-currencies low-frequency measures include: Volatility, CS
(from Corwin and Schultz (2012)), Gibbs (Hasbrouck (2009)). All the across-currencies
liquidity measures are obtained from the PCA (within measures) across individual FX
rates liquidites and standardized. * denotes the second factor in the rotation [Volatility,
CS, Gibbs]. ** denotes the third factor in the rotation [Volatility, CS, Gibbs]. C denotes
the second factor in the rotation [Volatility, Gibbs, CS]. CC denotes the third factor in the
rotation [Volatility, Gibbs, CS]. The t-statistics is shown in the brackets. Bold numbers
are statistically significant at the 5% level. The sample is January 2007 May 2012, 65
months.

45

CS
CS
1
Gibbs
0.812
Volatility
0.861
Systematic 0.931

Gibbs

Volatility

Systematic

1
0.877
0.935

1
0.973

Table 6: Correlation between the across-currencies low-frequency (LF) liquidities over 19912012. The table shows correlations between the across-currencies LF liquidities and systematic LF liquidity based on 40 FX rates. The across-currencies CS, Gibbs, and Volatility
liquidities are obtained from the PCA (within measures) across individual FX rate liquidites. The systematic liquidity measure is obtained from the PCA across FX rates as
well as across CS, Gibbs, and Volatility liquidities. Bold numbers are statistically significant at the 5% level. The significance test is the GMM based test using a Newey
and West (1987) covariance estimator with 4 lags. Correlations are computed using 257
non-overlapping monthly observations. The sample is January 1991 May 2012.

46

47

1)

255

0.3347

(1)
0.579
[55.415]

Systematic
FX volatility
(2)
0.567
[62.974]
0.065
[3.020]
0.3353
14
255

JP implied
FX volatility
(3)
0.572
[62.282]
0.065
[3.595]
0.3361
10
239
(4)
0.564
[66.052]
0.090
[5.916]
0.3358
18
255

TED spread

MSCI
volatility
(5)
0.569
[62.889]
0.064
[2.875]
0.3352
18
255

(6)
0.573
[51.205]
0.054
[2.118]
0.3350
18
255

VIX index

Mean USD
return
(7)
0.570
[63.163]
0.055
[2.124]
0.3351
16
255

Table 7: Commonality in FX liquidity in the distressed markets. Panel of changes in FX rate liquidities is regressed on the
changes in systematic FX liquidity and systematic FX liquidity 4LM;t , interacted with a dummy DDIS TRE S SEDMK T;t 1 .
DDIS TRE SSEDMK T;t 1 is equal to one if the risk factor (systematic FX volatility, JP implied FX volatility, TED spread, MSCI
volatility, VIX index or mean USD return) is more than 1.5 standard deviations above its unconditional mean. The intercepts
are omitted. Standard errors, robust to conditional heteroscedasticity and spatial correlations as in Driscoll and Kraay (1998),
are reported in brackets. Bold numbers are statistically significant at the 5% level. The sample for specifications (1), (2) and
(4)-(7) is January 1991 May 2012, the sample for specification (3) is April 1992 May 2012.

R2
Sum(DDISTRE SSEDMK T;t
Number of obs.

4LM;t
DDISTRE SSEDMK T;t

4LM;t

Simple panel

48

4 Fefunds rate

4TED

4iBAA

4 US def spread

MSCI return

4 MSCI vol

Int rates return

Int rates risk

Corp bonds return

Corp bonds risk

Stocks return

Stocks risk

0.395
255
01/1991
05/2012

0.103
[1.662]
-0.114
[-2.439]
0.062
[1.068]
-0.188
[-2.930]
0.047
[0.776]
-0.435
[-6.432]
-0.299
[-4.382]

(1)

0.504
241
04/1992
05/2012

(2)
-0.011
[-0.189]
-0.372
[-4.334]
0.063
[1.038]
-0.104
[-2.774]
0.035
[0.682]
-0.121
[-2.140]
-0.029
[-0.467]
-0.325
[-4.169]
-0.289
[-4.139]
-0.275
[-4.272]
0.212
[2.779]
0.392
[4.137]
0.283
179
01/1995
12/2009

(3)

32 currencies
(4)
-0.020
[-0.338]
-0.345
[-3.837]
-0.019
[-0.305]
-0.142
[-3.440]
0.019
[0.282]
-0.095
[-1.368]
-0.012
[-0.184]
-0.268
[-3.088]
-0.185
[-3.461]
-0.059
[-0.952]
0.172
[2.150]
0.537
179
01/1995
12/2009
0.393
255
01/1991
05/2012

0.109
[1.693]
-0.128
[-2.661]
0.063
[1.116]
-0.174
[-2.701]
0.050
[0.834]
-0.428
[-6.272]
-0.302
[-4.266]

(5)

0.484
241
04/1992
05/2012

(6)
0.016
[0.282]
-0.341
[-3.736]
0.070
[1.090]
-0.121
[-2.994]
0.034
[0.666]
-0.113
[-1.960]
-0.004
[-0.070]
-0.323
[-3.975]
-0.291
[-3.968]
-0.268
[-3.956]
0.200
[2.807]
0.394
[4.330]
0.281
179
01/1995
12/2009

(7)

23 developed currencies
(8)
0.012
[0.207]
-0.294
[-3.075]
-0.019
[-0.299]
-0.160
[-3.639]
0.011
[0.169]
-0.085
[-1.254]
0.020
[0.310]
-0.264
[-2.944]
-0.182
[-3.215]
-0.057
[-0.891]
0.192
[2.296]
0.517
179
01/1995
12/2009
0.240
255
01/1991
05/2012

0.050
[1.013]
-0.005
[-0.100]
0.062
[1.001]
-0.196
[-2.980]
0.027
[0.368]
-0.384
[-4.994]
-0.189
[-3.123]

(9)

0.391
241
04/1992
05/2012

(10)
-0.135
[-2.278]
-0.428
[-6.675]
0.013
[0.284]
0.018
[0.475]
0.053
[0.933]
-0.115
[-1.848]
-0.134
[-1.569]
-0.281
[-4.490]
-0.185
[-3.300]
-0.240
[-3.268]
0.234
[2.211]
0.251
[2.283]
0.153
179
01/1995
12/2009

(11)

11 emerging currencies
(12)
-0.163
[-2.165]
-0.510
[-6.721]
0.006
[0.104]
-0.004
[-0.095]
0.074
[0.905]
-0.105
[-1.150]
-0.159
[-1.575]
-0.250
[-2.910]
-0.143
[-2.334]
-0.044
[-0.487]
-0.008
[-0.106]
0.411
179
01/1995
12/2009

floating emerging currencies) is regressed on (a) non-FX contemporaneous risk and return variables, and lagged systematic FX liquidityspecifications
(1), (5), and (9), correspondingly; (b) all contemporaneous risk and return variables, and lagged systematic FX liquidityspecifications (2), (6), and
(10); (c) lagged systematic FX liquidity, contemporaneous stock and bond liquidityspecifications (3), (7), and (11); (d) all contemporaneous risk and
return variables, lagged systematic FX liquidity, and contemporaneous stock and bond liquidityspecifications (4), (8), and (12). All variables except
for mean USD return and MSCI stock return are in changes. Lagged systematic FX liquidity 4LM;t 1 is based on the PCA for all 40 currencies. The
t-statistics based on the standard errors, robust to conditional heteroscedasticity and serial correlation up to one lag as in Newey and West (1987), are
reported in brackets. Bold numbers are statistically significant at the 5% level. The full sample is January 1991 May 2012, 257 months.

Table 8: Explaining FX systematic liquidity. Systematic FX liquidity (based on the PCA for 32 floating currencies, 23 floating developed and 9

R2
Number of obs.
Start of the sample
End of the sample

4 Bond liquidity

4 Stock liquidity

4 JP FX impl vol

FX risk

4LM;t

"Best" factor
Mean USD return

Group
FX return

4LM;t is based on...

49

4 US def spread
Df loat

MSCI return
Df loat
4 US def spread
Df loat

Corp bonds risk

Stocks return

Stocks risk

4 US def spread
Df loat &cond

MSCI return
Df loat &cond
4 MSCI volatility
Df loat &cond

Corp bonds risk

Stocks return

Stocks risk

0.121

(2)
0.046
[1.139]
-0.086
[-3.714]
0.040
[1.300]
-0.053
[-1.685]
0.028
[0.763]
-0.198
[-5.135]
-0.198
[-4.726]
0.027
[0.936]
0.058
[1.783]
0.012
[0.321]
-0.099
[-2.337]
0.001
[0.027]
-0.108
[-2.286]
0.057
[1.806]
0.128

(1)
0.059
[1.575]
-0.056
[-2.088]
0.042
[1.260]
-0.104
[-2.919]
0.030
[0.846]
-0.252
[-6.675]
-0.168
[-4.598]

(3)
0.063
[1.430]
-0.087
[-3.600]
0.078
[2.264]
-0.113
[-2.854]
0.027
[0.664]
-0.216
[-4.798]
-0.184
[-4.077]
0.001
[0.032]
0.064
[1.628]
-0.082
[-2.041]
0.007
[0.114]
-0.004
[-0.084]
-0.106
[-1.743]
0.017
[0.399]
0.139

Carry trade risk

(4)
0.013
[0.354]
-0.076
[-3.294]
0.054
[1.857]
-0.050
[-1.774]
0.027
[0.836]
-0.201
[-5.457]
-0.146
[-3.953]
0.133
[3.055]
0.051
[1.434]
-0.019
[-0.512]
-0.156
[-3.774]
-0.002
[-0.049]
-0.127
[-3.019]
-0.094
[-2.389]
0.137

Volatility risk
(5)
0.033
[1.292]
-0.014
[-0.458]
0.037
[1.131]
-0.079
[-2.254]
0.036
[1.164]
-0.231
[-6.793]
-0.074
[-2.775]
0.042
[1.056]
-0.069
[-2.263]
0.008
[0.282]
-0.041
[-0.953]
-0.011
[-0.284]
-0.035
[-0.743]
-0.152
[-3.375]
0.127

Liquidity risk

and return variables and lagged systematic FX liquidity, interacted with the contemporaneous time-varying Df loat dummy, which takes one if and
only if the currency pair is floating. In columns (2)-(4) panel of FX rate liquidities is regressed on non-FX contemporaneous risk and return variables
and lagged systematic FX liquidity, interacted with the dummy Df loat &cond , which takes one if and only if the currency pair is floating and the risk
condition holds. The dummy in column (2) is one if a currency pair underperforms the cross-sectional average U.S. dollar return in that month (FX
return risk). The dummy in column (3) is one if a currency pair has forward premium higher than the cross-sectional average in that month (carry trade
risk). The dummy in column (4) is one if a currency pair has a higher realized volatility (monthly squared return) than the cross-sectional average
in that month (volatility risk). The dummy in column (5) is one if a currency pair has a stronger commonality than the sample average (liquidity
risk). The last dummy variable is (in contrast to the other dummies) not time-varying. All variables except for dummies and MSCI stock return are
in changes. Standard errors, robust to conditional heteroscedasticity and spatial correlations as in Driscoll and Kraay (1998), are reported in brackets.
Bold numbers are statistically significant at the 5% level. The sample is January 1991 May 2012, 257 months.

Table 9: Explaining FX currency-pair liquidities. In column (1) panel of FX rate liquidities is regressed on non-FX contemporaneous risk

R2

Df loat &cond

4iBAA
Df loat &cond

Corp bonds return

4 TED
Df loat &cond

Int rates risk

4LM;t

4 Fedfunds rate
Df loat &cond

Int rates return

Df loat

4iBAA
Df loat

Corp bonds return

4 TED
Df loat

Int rates risk

4LM;t

4 Fefunds rate
Df loat

Int rates return

FX return risk

Basic setup

Internet appendix to Understanding FX Liquidity

Nina Karnaukh, Angelo Ranaldo, Paul Sderlind
20 September 2013

Details on the Low-frequency Measures

For each currency pair, we compute the eight low-frequency liquidity measures most
widely used in the research on equity and corporate bonds: the Roll spread, BPW measure, bid-ask spread, Gibbs estimate, CS estimate, volatility, Effective Tick, and the LOT
measure. In the main horse races we do not consider price impact liquidity proxies from
Amihud (2002), Pstor and Stambaugh (2003) and Amivest proxy from Cooper, Groth,
and Avera (1985), Amihud, Mendelson, and Lauterbach (1997), since we do not have the
daily FX trading volumes data over the our sample period. We do not consider the Zeros
measure from Lesmond, Ogden, and Trzcinka (1999) and the FHT measure from Fong,
Holden, and Trzcinka (2011) due to the almost complete absence of unchanged FX mid
prices over two consequent trading days.
Our first low-frequency liquidity measure is the Roll estimator of transaction costs
from Roll (1984). Roll suggests a simple model of security prices in the market with
transaction costs
(
mt D mt 1 C ut
(1)
p t D m t C cq t
where m t is the log quote midpoint prevailing prior to the t t h trade (efficient price), p t
is the log trade price, and q t are direction indicators, which take the values +1 (for a buy)


University of St. Gallen. Address: SBF, University of St. Gallen, Rosenbergstrasse 52, CH9000 St. Gallen, Switzerland. E-mail adresses: Nina.Karnaukh@student.unisg.ch (N. Karnaukh), Angelo.Ranaldo@unisg.ch (A. Ranaldo), Paul.Soderlind@unisg.ch (P. Sderlind).

or -1 (for a sell) with equal probability. The disturbance, u t , reflects public information
and is assumed to be uncorrelated with q t . The Roll model (1) implies

p t D c
q t C u t ;

(2)

where
is a change operator. Given this setup, Roll shows that the effective (transaction)
cost c is the square root of minus auto-covariance of consecutive price changes. When
the auto-covariance is negative, we substitute the transaction cost estimator with zero.1
Instead of log trade prices, we use the daily log mid prices to compute the Roll estimate
( p
2
Cov.
p t ;
p t 1 /; when Cov.
p t ;
p t 1 / < 0,
Rol l D
(3)
0;
when Cov.
p t ;
p t 1 / > 0,
where
p t is the change of the log midquote price (the return) between t and t 1.
The Roll model is designed for the trade (tick) data and implies MA(1) process for
log price changes. Using time-aggregated (lower frequency) data in the Roll model does
not change the MA(1) property for log price changes.
The Roll estimate is feasible only if the first-order sample autocovariance is negative.
In samples of daily frequency this is often not the case. For instance, Roll (1984) finds
positive autocovariances in roughly half the cases in annual samples of daily returns.
Harris (1990) shows that positive autocovariances are more likely for low values of the
spread. Another problem arises when using the mid prices instead of the trade prices
to compute the Roll estimate. The estimated cost will generally be biased downward,
because midpoint realizations do not include the cost.
Being an estimate of the effective cost, the Roll spread is a measure directly linked to
liquidity. The higher is the Roll spread, the lower is the liquidity. We compute the Roll
estimate for each month in our sample from the daily mid prices data.
Our second low-frequency liquidity proxy is the gamma (BPW) measure for corporate
bond market from Bao, Pan, and Wang (2011). They show that BPW captures the broader
impact of liquidity on prices, above and beyond the effect of bid-ask spread. The BPW
measure is defined as
BP W D Cov.
p t ;
p t 1 /:
(4)
1

Goyenko, Holden, and Trzcinka (2009) also use this modified version of the Roll transaction cost
estimator.

The BPW estimate is a simple and robust measure of illiquidity for corporate bonds,
as argued by Bao et al. The higher is the BPW, the lower is liquidity. We compute the
BPW measure for each month in our sample from the daily mid FX prices data.
Our third low-frequency liquidity measure is the relative bid-ask spread(BA) defined
as
BA D .P A P B /=P;
(5)
where P is daily closing mid price, superscripts A, B indicate ask and bid. The BA spread
is the measure, directly linked to liquidity. The higher is the BA, the less liquid is the FX
rate. We get the monthly BA estimates by averaging the daily bid-ask estimates over the
month.
Our fourth low-frequency liquidity measure is the Gibbs effective cost estimate based
on the Bayesian approach to the Roll model (1), see Hasbrouck (2009). In particular,
Hasbrouck assumes that the disturbance u t is normally distributed with zero mean and
standard deviation  t . The transaction cost, c, standard deviation of the disturbance,
u2 , and trade direction indicators q are unknown parameters in the Roll model. The
unknown parameters are re-estimated using the Bayesian approach and Gibbs procedure.2
Hasbrouck corrects for possible negative transaction cost estimates in the Roll model by
restricting them to be positive in the Bayesian approach.
Being an estimator of effective cost, the Gibbs estimate is a direct proxy of liquidity.
The higher is the Gibbs, the lower is liquidity. We compute the Gibbs estimates for each
month from the daily log midquote prices. We run each Gibbs sampler for 1000 sweeps
and discard first 200 draws.
Joel Hasbrouck generously provides the programming code of the Gibbs estimation
procedure on his web-site. We use this code for our estimations. This code uses a halfnormal distribution - and we set (for
q each currency and month) the standard deviation of

the transaction cost prior equal to p A p B , where p A and p B are the monthly averages
of log ask and log bid prices, respectively. The estimates are robust to this choice, unless
we choose a very small value. Using a higher number of sweeps (up to 10000) or changing
the prior of the transaction cost does not affect the mean parameter estimates materially.
However, there are two exceptions to this finding: (a) setting the standard deviation of
the prior to a very small value (eg. 0.001) gives estimates that are much less correlated
2

See Hasbrouck (2009) for detailed description of the estimation procedure.

with the HF benchmark; (b) when we study liquidity on a weekly instead of the monthly
frequency, then the prior becomes more important. (The latter confirms the evidence in
Hasbrouck (2009).)
Our fifth low-frequency liquidity measure is the CS, the simple closed-form bid-ask
estimator from daily high and low prices from Corwin and Schultz (2012). The daily high
prices are almost always buyer-initiated trades and daily low prices are almost always
seller-initiated trades. The ratio of high-to-low prices for a day therefore reflects both the
fundamental volatility of the asset and its bid-ask spread. Although the variance component of the high-low ratio is proportional to the return interval, the spread component is
not. The component of the high-to-low price ratio that is due to volatility increases proportionately with the length of the trading interval, while the component due to bid-ask
spreads does not. This implies that the sum of the price ranges over 2 consecutive single
days reflects 2 days volatility and twice the spread, while the price range over one 2-day
period reflects 2 days volatility and one spread. Corwin and Schultz derive a spread estimator as a function of high-low ratios over 1-day and 2-day intervals. Since the high-low
estimator relies on the volatility of the asset to derive the spread estimate, the CS estimate
seems to mix liquidity and volatility. In fact, the high-low estimator may capture other
forms of transitory volatility, and therefore liquidity costs, that are not reflected in the
effective spread (see Corwin and Schultz (2012)).
The method produces an estimate of the spread and an estimate of the daily standard
deviation using only the high and low prices from 2 consecutive days. The CS (highlow
spread estimate) is calculated as
2.e 1/
 , for small values of 2 0:25; 0:25 ;
1 C e

p p
1
p
where D 1 C 2
p
p
3 2 2

p  p
p
D 1C 2 .
/;
  2  
2
 

Ht
H t C1
H t;tC1 2
D ln
C ln
; and D ln
;
Lt
L t C1
L t;tC1
CS D

(6)

(7)

where H t and L t denote the observed high and low prices on day t (similarly for day
t C 1), while H t;tC1 and L t;tC1 are the high and low over two days (t to t C 1). We
apply the simplified expression (7) to compute the monthly CS estimates. Using the

original expression from Corwin and Schultz (2012) gives same results. We compute the
CS spread estimates separately for each 2-day period and calculate the average across all
overlapping 2-day periods in the month.
Before applying the estimator, we correct for the overnight returns, as described by
Corwin and Schultz. We use the Reuters daily high and low prices to compute the monthly
CS spread estimates. The drawback of the method is an increasing number of negative
transaction costs estimates when the spread is squeezing. Therefore, when the CS transaction cost estimate is negative, we set it to zero. The higher is the CS, the lower is the
liquidity.
Our sixth low-frequency liquidity measure is the Volatility of daily mid-prices data,
computed for each month. Tinic and West (1972) argue that there is a positive relationship between spreads and price volatility for the reason that the greater the variability
in price, the greater risk associated with the performance of the dealership function. If
possessed monopolistically by traders who have no competitors, more rampant asymmetric information should increase both volatility and spreads, inducing correlation but not
causation; and if, as seems plausible, informed traders earn greater profits when volatility
is generally high, spreads should increase in response (see Chordia, Roll, and Subrahmanyam (2001)). Following Menkhoff, Sarno, Schmeling, and Schrimpf (2012), we use
a straightforward measure to proxy for FX volatility. First, we calculate the absolute daily
log return for each day. Then, we average daily values up to the monthly frequency. This
proxy has obvious similarities to measure of realized volatility (see, for example, Andersen, Bollerslev, Diebold, and Labys (2001)), although we use absolute returns and not
squared returns to minimize the impact of outlier returns.
Our seventh low-frequency liquidity measure is the Effective Tick (Efftick) from Holden
(2009) and Goyenko, Holden, and Trzcinka (2009). The Efftick is the effective spread
proxy based on the observable price clustering. Following the negotiation cost theory of
Harris (1991), Holden assumes that transaction prices are clustered in order to minimize
negotiation costs between potential traders. The frequency of price clusters (or the frequency of a specific last digit in the observed prices) is used to infer the effective spread.
For example, transaction prices of a type an integer plus 0.23 can only be observed when
the spread is one cent. Alternatively, prices of a type an integer plus 0.25 can be triggered
either by a one cent of by a five cent spread.
We adjust the Efftick method for the fact, that FX mid prices are available for each
5

day.3 Assuming that the realization of the spread on the daily mid price is randomly
drawn from a set of possible spreads 0.01, 0.05, 0.1, 0.25, 1, we compute the Efftick
measure as a probability-weighted average of each effective spread size divided by the
average mid price over the month
PJ

kD1 Oj sj

Eff tick D

PN

MinMaxfUj ; 0g; 1;

<

(8)
j D1

j 1
X

Oj ; j D 2 : : : J ,

:MinMaxfUj ; 0g; 1
kD1
8 
A

F1 ;
j D1

< B1

Uj D  
j 1
X
Aj
Oj k

Fk ; j D 2 : : : J ,

: Bj Fj
Bk

Oj D

(9)

(10)

kD1

Nj
Fj D PJ

kD1

Nj

(11)

where Oj and Uj are the constrained and unconstrained probabilities of the j th spread
(j D 1; 2; : : : J , J D 5); Aj are the total number of midpoints corresponding to the
j th spread (A D 100; 20; 10; 4; 1 for our price grid); Bj is the number of special midpoints corresponding to the j th spread (B D 80; 16; 10; 4; 1); Oj k is the number of
overlapping midpoints for the j th spread which overlap the midpoints of the kth spread
and do not overlap the midpoints of any spread between j th spread and kth spread
(O21 D 20; O42 D 4; O31 D O41 D O43 D O51 D O52 D O53 D O54 D 0 for
our decimal price grid). For more detailed examples of the modification of Holden model
to accommodate decimal grid see www.kelley.iu.edu/cholden/examples.pdf; Fj are the
probabilities of mid prices corresponding to the j th spread; Nj is the observed number of
mid prices corresponding to the j th spread.
For each month, we scale the mid FX prices to fit the relevant possible effective
spreads grid. For example, if in one month the maximum number of digits in the daily
3

Goyenko, Holden, and Trzcinka (2009) and Holden (2009) use CRSP data, where closing price for
trade and mid price for no-trade days are available. Therefore they need to accommodate for the absence of
information whether the closing trade is at ask, bid or mid. Since we have mid prices data for every trading
day, we do not have to do this adjustment.

mid prices is five after the point (say, 1.28265 for EUR/USD mid-price), we multiply all
prices in this month by 1000. As the result, the maximum number of digits after the point
is two, that makes the set of possible spreads 0.01, 0.05, 0.1, 0.25, 1 relevant.
The larger is the Efftick, the less liquid is the FX rate. Being an estimator of effective
spread, the Efftick is directly linked to liquidity. We compute the monthly Efftick estimates
from daily mid prices.
Our eighth low-frequency liquidity measure is the LOT effective spread estimator
from Lesmond, Ogden, and Trzcinka (1999). The approach is based on the assumption
that the security with higher transaction costs has less frequent price movements and more
zero returns than a security with lower transaction costs. Following the setting of the LOT
model, we assume that the observable "true return" rjt of FX rate j on day t is given by
rjt D j rmt C ejt ;

(12)

where j is the sensitivity of FX rate j to the market return rmt on day t and ejt is a
public information shock on day t. The shock ejt is normally distributed with mean zero
and standard deviation j . We use the Fed effective exchange rate as the proxy for a
market return in the LOT model. Alternatively, we use the average exchange rate return
across the nine exchange rates as the market return in the LOT model. The resulting LOT
estimates have lower correlations with the effective cost benchmark.
Let 1j 6 0 be the percent transaction cost of selling FX rate j and 2j > 0 be the
percent transaction cost of buying FX rate j . Then the observed return rjt on FX rate j
is given by
8



rjt D rjt 1j ; rjt < 1j

<
(13)
rjt D rjt ;
1j < rjt < 2j

:
rjt D rjt 2j ; 2j < rjt .
The LOT liquidity measure is the difference between the percent buying cost and the
percent selling cost
LOT D 2j 1j :
(14)
Lesmond, Ogden, and Trzcinka (1999) develop the following maximum likelihood

estimator of the models parameters

Y 1  rjt C 1j j rmt 
L.1j ; 2j ; j ; j jrjt ; rmt / D


j
j
1





Y
2j j rmt
1j j rmt


j
j
0


Y 1
rjt C 2j j rmt


j
j
2

(15)

s:t: 1j 6 0; 2j > 0; j  0; j  0;
where ./ is the standard normal and ./ is the cumulative normal distribution. Following Lesmond, Ogden, and Trzcinka (1999), we define the three regions over which the
estimation is done. Region 0 is rjt D 0, region 1 is rjt > 0 and region 2 is rjt < 0.
We compute the LOT effective cost estimate for each month using the daily mid prices
and the daily effective exchange rate prices. The higher is the LOT, the lower is the FX
rate liquidity. We are very grateful to David Lesmond for providing us with the code for
computing the LOT measure.
As a robustness check, we extended the set of LF liquidity measures to three price
impact proxies, namely the liquidity measures proposed by Amihud (2002), Pstor and
Stambaugh (2003) and the so-called Amivest proxy from Cooper, Groth, and Avera (1985)
and Amihud, Mendelson, and Lauterbach (1997). These proxies require trading volume
data, which are available only from January 2007. We decided to exclude these proxies
from the main analysis (above) since they are not helpful in building LF proxies for a long
sample period.
The Amihud proxy proposed by Amihud (2002) measures the absolute price changes
per unit of dollar volume
j rt j
;
(16)
Amihud D
t
where r t is the currency return on day t and  t is the dollar volume on day t. We use
the daily volume data from Thomson Reuters that is available for all nine currencies from
17 January 2007. Thus, we use 11 daily observations to compute the monthly Amihud
estimates for January 2007.
The higher is the Amihud, the less liquid is the FX rate (larger price impact). We get
the monthly Amihud estimates by averaging the daily Amihud estimates over the month.

Pstor and Stambaugh (2003) introduce price impact measure called gamma ( ),
which is estimated from the regression
r teC1 D  C r t C sign.r te / t C " t ;

(17)

where r t is the daily log currency return; r te is the daily excess currency return on day t,
e
computed as r tC1
 f t s t C1 , where f t is the log forward rate at day t and s t C1 is the
spot rate at day t C 1; sign.r te / is one if r te is positive, and zero otherwise. Since daily
excess currency returns are almost perfectly (above 0.99) correlated with the daily log
currency returns, we use the latter in the regression. We estimate the regression for each
month to get monthly (Pastor-Stambaugh) estimates. The gamma measure should have
a negative sign. The larger is the in absolute terms, the lower is liquidity (larger price
impact).
The Amivest proxy is a measure of price impact, used by Cooper, Groth, and Avera
(1985) and Amihud, Mendelson, and Lauterbach (1997), and others. The Amivest proxy
is defined as
t
(18)
Amivest D
j rt j
and calculated over all non-zero-return days. The larger is the Amivest, the higher is
liquidity (lower price impact).

Additional Tables and Figures

In this section we show some further tables and figures from the paper "Understanding
FX Liquidity" by Karnaukh, Ranaldo, and Sderlind.

(a) Minus effective cost

(b) Minus bidask

4
01/07 01/08 02/09 03/10 04/11 04/12

4
01/07 01/08 02/09 03/10 04/11 04/12

(c) Minus price impact

(d) Return reversal

4
01/07 01/08 02/09 03/10 04/11 04/12

4
01/07 01/08 02/09 03/10 04/11 04/12

(e) Minus price dispersion

(f) Minus systematic liquidity

4
01/07 01/08 02/09 03/10 04/11 04/12

4
01/07 01/08 02/09 03/10 04/11 04/12

Figure 1: Across-currencies and systematic high-frequency (HF) liquidity Panels (a)(e)

depict the monthly standardized across-currencies HF liquidity based on the PCA (within
measures) across individual FX rate liquidities. Systematic HF liquidity depicted in Panel
(f) is obtained from the PCA across exchange rates as well as across liquidity measures.
The sign of each liquidity measure is adjusted such that the measure represents liquidity
rather than illiquidity: Minus price impact (Panel (a)), Return reversal (Panel (b)), Minus
bid-ask (Panel (c)), Minus effective cost (Panel (d)), Minus price dispersion (Panel(e)),
Minus systematic liquidity (Panel (f)). The sample is January 2007 May 2012.

10

(a) Effective Cost

(b) BidAsk

0.5

0.5

0.5

10

15

0.5

20

(c) Price Impact

1

0.5

0.5

0
0

10

15

0.5

20

(e) Price Dispersion

1

0.5

0.5

0
0

10

20

15

10

15

20

15

20

(f) Systematic

0.5

15

(d) Return Reversal

0.5

10

0.5

20

10

Figure 2: Autocorrelations of monthly systematic FX high-frequency liquidity. Panels (a)

(e) depict autocorrelations (up to 20 lags) for the monthly across-currencies HF liquidity
based on the PCA (within measures) across individual FX rate liquidities. Panel (f) depicts
the autocorrelation of the systematic HF liquidity, which is obtained from the PCA across
exchange rates as well as across five HF liquidity measures. The solid horizontal lines
indicate upper and lower 95% confidence bounds. The sample is January 2007 May
2012.

11

(a) Roll

(b) BPW

(c) BidAsk

2
0
2
4
6

2
0
2
4
6

2
0
2
4
6

01/07 05/08 09/09 01/11 05/12

01/07 05/08 09/09 01/11 05/12

01/07 05/08 09/09 01/11 05/12

(d) CS

(e) Gibbs

(f) Volatility

2
0
2
4
6

2
0
2
4
6

2
0
2
4
6

01/07 05/08 09/09 01/11 05/12

01/07 05/08 09/09 01/11 05/12

01/07 05/08 09/09 01/11 05/12

(g) EffTick

(h) LOT

2
0
2
4
6

2
0
2
4
6

01/07 05/08 09/09 01/11 05/12

01/07 05/08 09/09 01/11 05/12

Figure 3: Across-currencies low-frequency (LF) liquidity vs across-currencies effective cost.

Panels (a)(h) depict monthly standardized across-currencies LF liquidity based on the
PCA (within measures) across individual FX rate liquidities. The standardized acrosscurrencies effective cost liquidity is dotted. The sign of each liquidity measure is adjusted
such that the measure represents liquidity rather than illiquidity. The sample is January
2007 May 2012.

12

(a) Roll

(b) BPW

(c) BA

0.5

0.5

0.5

0.5

10

15

20

0.5

(d) CS

10

15

20

0.5

0.5

0.5

0.5

10

15

20

0.5

(g) EffTick

10

15

20

0.5

0.5

0.5

0.5

10

15

20

0.5

10

15

20

10

15

20

15

20

(i) Systematic

(h) LOT

0.5

10
(f) Volatility

(e) Gibbs

0.5

15

20

0.5

10

Figure 4: Autocorrelations of the monthly low-frequency (LF) liquidities. Panels (a)(h)

depict autocorrelations (up to 20 lags) of the monthly across-currencies LF liquidities
based on the PCA (within measures) across individual FX rate liquidities. Panel (i) depicts the autocorrelation of the systematic LF liquidity, which is obtained from the PCA
across exchange rates as well as across three best LF liquidity measures (CS, Gibbs and
Volatility). The solid horizontal lines indicate upper and lower 95% confidence bounds.
The sample is January 2007 May 2012.

13

Regression coefficient

LF liquidity
Volatility
CS*
Gibbs**

0.8

0.6

0.4

0.2

0.25

0.5
Quantile

0.75

Figure 5: Beta coefficients in the quantile regressions of the EC on the LF measures. For
each quantile (0.25, 0.5, 0.75), we run three quantile regressions of the across-currencies
effective cost on (1) systematic LF liquidity (first PC across the FX rates and the three
best LF measures), (2) across-currencies Volatility, (3) across-currencies Volatility, CS*
and Gibbs**. Four bars represent the beta coefficients in these quantile regressions, from
left to right: coefficient of the systematic LF liquidity in the regression (1), coefficient of
the Volatility in the regression (2), coefficient of the CS* in the regression (3), coefficient
of the Gibbs** in the regression (3). The bars representing insignificant beta coefficients
are filled with white. * denotes the second factor in the rotation [Volatility, CS, Gibbs].
** denotes the third factor in the rotation [Volatility, CS, Gibbs]. The sample is January
2007 May 2012, 65 months.

14

(a) CS

(b) Gibbs

6
1991

1996

2001

2006

6
1991

2011

(c) Volatility
2

1996

2001

2006

2001

2006

2011

(d) Systematic liquidity

6
1991

1996

6
1991

2011

1996

2001

2006

2011

Figure 6: Across-currencies and systematic low-frequency (LF) FX liquidity over 1991-2012.

Panels (a)(c) depict the monthly standardized across-currencies LF liquidity obtained
from the PCA (within measures) across the forty exchange rates. Panel (d) depicts the
systematic LF liquidity obtained from the PCA across the 40 exchange rates as well as the
three best LF liquidity measures (CS, Gibbs and Volatility). The sign of each liquidity
measure is adjusted such that the measure represents liquidity rather than illiquidity. The
sample is January 1991 May 2012, 257 months.

15

(a) CS

(b) Gibbs

0.5

0.5

0.5

10

15

0.5

20

(c) Volatility
1

0.5

0.5

10

15

20

15

20

(d) Systematic

0.5

10

15

0.5

20

10

Figure 7: Autocorrelations of the monthly low-frequency (LF) liquidities over 1991-2012.

Panels (a)(c) depict autocorrelations (up to 20 lags) of the monthly best acrosscurrencies LF liquidities (CS, Gibbs and Volatility) based on the PCA (within measures)
across individual FX rate liquidities. Panel (i) depicts the autocorrelation of the systematic LF liquidity, which is obtained from the PCA across forty exchange rates as well as
across the three best LF liquidity measures (CS, Gibbs and Volatility). The solid horizontal lines indicate upper and lower 95% confidence bounds. The sample is January
1991 May 2012.

16

17
6.87
4.01

-0.024
0.015

0.128
0.068

2.331
1.015

0.388
0.125

-0.092
0.044

0.432
0.175

4.019
1.645

0.760
0.260

EUR/GBP

EUR/USD

0.292
0.053

1.057
0.227

0.070
0.029

-0.053
0.025

-0.013
0.005

Return reversal (K=5)

0.242
0.113

Price impact

2.418
0.717

Bid-ask spread (in bps)

0.460
0.132

Effective cost (in bps)

EUR/JPY

-0.093
0.059

0.383
0.199

4.480
3.603

0.693
0.381

GBP/USD

8.70
3.36

13.26
6.06

9.89
3.64

11.18
6.09

11.91
4.28

-0.131
0.066

0.689
0.248

6.050
3.328

1.074
0.406

USD/CAD

Price dispersion (TSRV, five minutes, in %, annualized)

EUR/CHF

10.87
3.49

-0.024
0.013

0.172
0.061

2.539
0.812

0.473
0.094

10.23
3.83

-0.020
0.009

0.099
0.041

1.501
0.364

0.401
0.091

USD/CHF USD/JPY

Table 1: Monthly liquidity measures from high-frequency (HF) data. The table shows summary statistics for FX liquidity
measures computed from one-min data. Effective cost spread denotes the monthly average of daily effective cost estimates.
The effective cost is measured as in Equation (1), in bps. Bid-ask spread denotes the monthly average of daily proportional
bid-ask spreads. The proportional bid-ask spread is measured as in Equation (2), in bps. Price impact is monthly average
of daily estimated coefficients of contemporaneous order flow in a regression of one-minute returns on the contemporaneous
and lagged order flow (Equation (3)). Return reversal is monthly average of daily sum of estimated coefficients of lagged
order flow (1-5 lags) in the same regression. Price dispersion is estimated using two-scale realized volatility (TSRV). It is
expressed in a percentage on an annual basis. The sample covers 65 months, January 2007 May 2012.

15.00
7.84

Mean
Std. dev.

0.804
0.533

Mean
Std. dev.

-0.153
0.117

4.693
2.982

Mean
Std. dev.

Mean
Std. dev.

1.119
0.652

Mean
Std. dev.

AUD/USD

18
0.18
0.23

1.14
0.95

1.25
0.91

0.17
0.14

0.11
0.14

7.37
1.76

0.03
0.12

0.25
0.32

EUR/CHF

0.27
0.26

1.64
1.13

1.59
0.71

0.19
0.09

0.13
0.09

4.80
0.83

-0.01
0.16

0.24
0.28

EUR/GBP

EUR/USD

0.32
0.38

0.03
0.15

2.38
0.45

0.14
0.15

0.26
0.15

1.91
0.75

1.12
0.68

0.40
0.40

0.36
0.32

LOT measure (in %)

1.31
1.36

EffTick measure (in bps)

2.45
1.26

Volatility (in %, annualized)

0.33
0.22

Gibbs measure (in %)

0.19
0.22

CS measure (in %)

6.14
0.96

Bid-ask spread (in bps)

0.12
0.31

BPW measure (in bps)

0.53
0.57

Roll spread (in %)

EUR/JPY

0.31
0.35

1.04
0.91

1.80
0.83

0.24
0.12

0.14
0.12

2.42
0.44

0.01
0.13

0.30
0.30

GBP/USD

0.34
0.29

1.82
1.45

1.98
0.86

0.26
0.13

0.15
0.13

4.16
0.39

0.05
0.15

0.36
0.40

USD/CAD

0.35
0.30

1.49
1.20

1.99
0.74

0.27
0.15

0.17
0.15

4.91
1.45

0.05
0.22

0.43
0.45

USD/CHF

0.30
0.29

0.45
0.76

1.89
0.81

0.25
0.15

0.15
0.15

3.68
0.67

0.07
0.22

0.41
0.47

USD/JPY

Table 2: Monthly liquidity measures from low-frequency data. The table shows summary statistics for various low-frequency
measures of liquidity. The Roll measure (from Roll (1984)) is computed as the square root of negative consecutive price
changes autocovariance, if the autocovariance is positive, and zero, otherwise. The BPW measure (from Bao, Pan, and Wang
(2011) is computed as minus autocovariance of consecutive price changes. Bid-ask (BA) is the average over daily relative
bid-ask estimates. The CS measure is computed as in Corwin and Schultz (2012). The Gibbs measure is computed as in
Hasbrouck (2009). The Volatility is computed as in Menkhoff, Sarno, Schmeling, and Schrimpf (2012). The EffTick measure
is computed as in Holden (2009). The LOT measure is computed as in Lesmond, Ogden, and Trzcinka (1999). The sample
covers 65 months, January 2007 May 2012.

0.48
0.53

Mean
Std. dev.

0.37
0.26

Mean
Std. dev.

1.88
1.08

0.19
0.26

Mean
Std. dev.

Mean
Std. dev.

4.60
0.87

Mean
Std. dev.

2.76
1.74

0.28
1.21

Mean
Std. dev.

Mean
Std. dev.

0.70
0.88

Mean
Std. dev.

AUD/USD

19
-7.87
18.55

62.35
60.20

9.57
6.07

EUR/CHF

-7.58
17.14

35.28
23.01

11.52
5.82

EUR/GBP

57.84
46.97

Amivest

7.90
4.10

-5.21
13.81

-2.80
9.75

Pastor-Stambaugh

37.08
30.18

12.67
6.64

EUR/USD

Amihud

EUR/JPY

-4.49
13.94

48.79
44.50

9.53
6.26

GBP/USD

-5.35
22.46

27.55
19.36

16.95
12.80

USD/CAD

-4.52
11.50

38.10
25.88

10.87
4.17

-3.14
11.01

54.89
40.95

8.26
3.54

USD/CHF USD/JPY

Table 3: Monthly quote-based liquidity measures from low-frequency data. This table shows summary statistics for monthly
quote-based low-frequency (LF) measures of liquidity. The volume-based LF measures are: Amihud from Amihud (2002),
Amivest from Cooper, Groth, and Avera (1985) and Amihud, Mendelson, and Lauterbach (1997), and Pastor-Stambaugh from
Pstor and Stambaugh (2003). Amihud and Pastor-Stambaugh measures are multiplied by 100,000,000. Amivest measures
are divided by 1,000,000. The sample covers 65 months, January 2007 - May 2012.

-0.42
16.89

27.60
25.40

Mean
Std. dev.

Mean
Std. dev.

16.18
10.28

Mean
Std. dev.

AUD/USD

Roll
Roll
BPW
BA
CS
Gibbs
Volatility
EffTick
LOT

BPW

1
0.748
1
0.381 0.311
0.708 0.537
0.715 0.541
0.747 0.694
0.025 -0.127
0.425 0.578

BA

CS

1
0.659
1
0.594 0.876
0.669 0.924
-0.237 -0.006
0.521 0.595

Gibbs

Volatility

EffTick

LOT

1
0.912
0.056
0.591

1
-0.072
0.624

1
-0.120

Table 4: Correlations between the across-currencies low-frequency (LF) liquidity measures.

The table shows correlations between across-currencies LF liquidity measures for the FX
market. The LF liquidity measures are: Roll from Roll (1984), BPW from Bao, Pan,
and Wang (2011), BA is the relative bid-ask spread, CS from Corwin and Schultz (2012),
Gibbs from Hasbrouck (2009), Volatility, EffTick from Holden (2009), and LOT from
Lesmond, Ogden, and Trzcinka (1999). The across-currencies measures are obtained
from the PCA (within measures) across individual FX rate liquidites. Bold numbers are
statistically significant at the 5% level. The significance test is the GMM based test using
a Newey and West (1987) covariance estimator with 4 lags. Correlations are computed
using 65 non-overlapping monthly observations. The sample is January 2007 May 2012,
65 months.

20

Roll

BPW

BA

CS

Gibbs

Volatility

Panel A. Whole sample (Jan 2007 - May 2012), 65 months

0.584
0.555
0.663
0.896
0.890
0.930
Idf
BPW
Roll
Roll
Gibbs
CS
CS
BA
BA
BPW Volatility Volatility
Gibbs
LOT
LOT
LOT
Panel B. Pre-crisis (Jan 2007 - Jun 2008), 18 months
0.493
0.282
0.704
0.838
0.761
0.887
Idf
BPW
Roll
Roll
BA
BA
BA
BA Efftick
CS
Gibbs
CS
CS
LOT
LOT
Gibbs Volatility
Gibbs
Gibbs
Volatility
Volatility
Panel C. Financial crisis (Jul 2008 - Dec 2009), 18 months
0.568
0.591
0.818
0.902
0.900
0.935
Idf
BPW
Roll
BPW
BA
BA
BA
BA
BA
BA
Gibbs
CS
CS
CS Volatility Volatility
Gibbs
Gibbs
Volatility
LOT
Panel D. European sovereign debt crisis (Jan 2010 - May 2012), 29 months
0.445
0.110
0.390
0.826
0.763
0.783
Idf
BA
BA
Roll
Gibbs
CS
CS
EffTick
BPW Volatility Volatility
Gibbs
LOT
EffTick
LOT

EffTick

LOT

0.023
*

0.612
Roll
BPW
BA

-0.156
BPW
LOT

0.066
Roll
BPW
EffTick

0.072
*

0.702
BA

0.086
BPW
BA
LOT

0.139
BPW
BA
EffTick

Table 5: Correlations between the across-currencies LF liquidities and the EC (extended).

The table shows times-series correlations of the across-currencies LF liquidities with the across-currencies
effective cost over the whole period (Panel A) and over three subperiods: pre-crisis, January 2007 June
2008 (Panel B), financial crisis, July 2008 December 2009 (Panel C) and European sovereign debt crisis,
January 2010 May 2012 (Panel D). The monthly low-frequency spread proxies are: Roll from Roll (1984),
BA is the relative bid-ask spread, BPW from Bao, Pan, and Wang (2011), CS from Corwin and Schultz
(2012), Gibbs from Hasbrouck (2009), Volatility, EffTick from Holden (2009), and LOT from Lesmond,
Ogden, and Trzcinka (1999). The across-currencies measures are based on PCA (within measures) across
the individual FX rate liquidites. Bold numbers are statistically significant at the 5% level. * means that the
correlation is statistically significantly different at the 5% level from all other correlations in the same row.
Both significance tests are the GMM based tests using a Newey and West (1987) covariance estimator with
4 lags. **Idf stands for insignificantly different from. The sample covers 65 months, January 2007 May
2012.

21

AUD/USD
EUR/CHF
EUR/GBP
EUR/JPY
EUR/USD
GBP/USD
USD/CAD
USD/CHF
USD/JPY
Average

Amihud

Amivest

PastorStambaugh

0.892
0.537
0.540
0.458
0.866
0.906
0.748
0.340
0.765
0.673

-0.321
-0.481
-0.193
0.012
-0.457
-0.351
-0.503
-0.186
-0.399
-0.320

0.028
0.046
-0.070
-0.114
-0.075
-0.186
-0.164
0.087
-0.227
-0.075

Table 6: Correlations between the volume-based FX rate low-frequency and effective

cost liquidity. The table shows the time-series correlations of the three volume-based
low-frequency measures for each exchange rate with the effective cost measure for the
same exchange rate. Effective cost denotes the monthly average of daily effective cost
estimates. The monthly volume-based low-frequency proxies are: Amihud from Amihud (2002), Amivest from Cooper, Groth, and Avera (1985) and Amihud, Mendelson,
and Lauterbach (1997), and Pastor-Stambaugh from Pstor and Stambaugh (2003). Bold
numbers are statistically significant at the 5% level. The sample covers 65 months, January 2007 - May 2012.

22

23

EUR/CHF EUR/GBP

EUR/JPY

EUR/USD

0.733

0.938

0.334

0.535

0.846

0.742

0.731

USD/CAD

0.908

GBP/USD

0.818

0.888

0.891

0.869

0.450

0.807

0.753

0.768

USD/CHF USD/JPY

Table 7: Correlation between the across-measures LF liquidity and the EC. The table shows times-series correlations of the
across-measures low-frequency (LF) liquidity with the effective cost for each FX rate over the whole period and over three
subperiods: pre-crisis, January 2007 June 2008, financial crisis, July 2008 December 2009 and European sovereign debt
crisis, January 2010 May 2012. The across-measures liquidity is based on the PCA (within FX rates) across the best LF
liquidity measures. Bold numbers are statistically significant at the 5% level (GMM based tests using a Newey and West
(1987) covariance estimator with 4 lags). The sample covers 65 months, January 2007 - May 2012.

Whole sample (Jan 2007 - May 2012), 65 months

0.877
0.855
0.825
0.765
0.672
Pre-crisis (Jan 2007 - Jun 2008), 18 months
0.720
0.813
0.693
0.590
-0.407
Financial crisis (Jul 2008 - Dec 2009), 18 months
0.900
0.903
0.892
0.856
0.909
European sovereign debt crisis (Jan 2010 - May 2012), 29 months
0.393
0.867
0.613
0.531
0.341

AUD/USD

Roll

BPW

AUD/USD
EUR/CHF
EUR/GBP
EUR/JPY
EUR/USD
GBP/USD
USD/CAD
USD/CHF
USD/JPY
Average

0.685
0.440
0.180
0.462
0.303
0.143
0.019
0.298
0.323
0.317

0.613
0.200
-0.236
0.443
0.120
-0.207
-0.065
0.065
0.307
0.138

AUD/USD
EUR/CHF
EUR/GBP
EUR/JPY
EUR/USD
GBP/USD
USD/CAD
USD/CHF
USD/JPY
Average

0.650
0.404
0.187
0.688
0.256
0.065
-0.023
0.163
0.457
0.316

0.616
0.174
-0.190
0.715
0.073
-0.338
0.053
0.043
0.460
0.178

AUD/USD
EUR/CHF
EUR/GBP
EUR/JPY
EUR/USD
GBP/USD
USD/CAD
USD/CHF
USD/JPY
Average

-0.718
-0.351
-0.100
-0.457
-0.347
-0.182
0.120
-0.241
-0.499
-0.308

-0.708
-0.163
0.186
-0.485
-0.228
0.225
0.128
-0.197
-0.489
-0.192

AUD/USD
EUR/CHF
EUR/GBP
EUR/JPY
EUR/USD
GBP/USD
USD/CAD
USD/CHF
USD/JPY
Average

0.757
0.453
0.060
0.756
0.341
-0.074
0.123
0.397
0.628
0.382

0.683
0.158
-0.470
0.779
0.160
-0.576
0.009
0.143
0.606
0.166

BA

CS

Gibbs

Bid-ask spread
0.862
0.808
0.773
0.747
0.696
0.546
0.650
0.630
0.682
0.678
0.656
0.747
0.628
0.615
0.601
0.716
0.684
0.574
0.692
0.673
Price impact
0.459
0.776
0.744
0.439
0.693
0.687
0.453
0.615
0.558
0.499
0.705
0.755
0.599
0.697
0.730
0.624
0.710
0.759
0.236
0.430
0.475
0.175
0.447
0.530
0.486
0.788
0.714
0.441
0.651
0.661
Return reversal
-0.372
-0.825
-0.801
-0.382
-0.616
-0.529
-0.473
-0.563
-0.365
-0.630
-0.633
-0.633
-0.602
-0.699
-0.642
-0.655
-0.712
-0.723
-0.087
-0.252
-0.364
-0.104
-0.332
-0.417
-0.380
-0.731
-0.679
-0.409
-0.596
-0.572
Price dispersion
0.471
0.893
0.890
0.576
0.850
0.890
0.742
0.808
0.663
0.593
0.790
0.838
0.606
0.761
0.722
0.709
0.795
0.722
0.135
0.719
0.737
0.465
0.642
0.778
0.509
0.863
0.801
0.534
0.791
0.782
0.489
0.617
0.604
0.774
0.640
0.653
0.211
0.470
0.450
0.545

Volatility EffTick

LOT

0.865
0.810
0.736
0.678
0.860
0.786
0.753
0.866
0.695
0.783

0.093
0.157
0.189
0.041
-0.163
-0.085
0.018
-0.013
-0.411
-0.019

0.635
0.402
0.173
0.334
0.303
0.289
0.146
0.292
0.170
0.305

0.791
0.797
0.717
0.842
0.892
0.822
0.491
0.542
0.805
0.744

0.047
0.111
0.042
-0.020
-0.088
-0.142
0.074
0.015
-0.268
-0.025

0.579
0.310
0.220
0.403
0.238
0.358
-0.045
-0.037
0.198
0.247

-0.888
-0.613
-0.558
-0.678
-0.783
-0.734
-0.467
-0.255
-0.770
-0.638

-0.153
-0.084
0.066
-0.050
0.104
0.053
-0.025
0.063
0.184
0.018

-0.749
-0.351
-0.092
-0.388
-0.198
-0.271
-0.028
-0.062
-0.243
-0.265

0.969
0.966
0.921
0.939
0.965
0.941
0.891
0.905
0.944
0.938

0.176
0.269
0.019
-0.069
-0.077
-0.062
0.084
0.005
-0.138
0.023

0.709
0.468
0.151
0.410
0.261
0.302
0.231
0.389
0.258
0.353

Table 8: Correlations of the FX rate LF and (alternative to effective cost) HF liquidity measures. The
table shows the time-series correlations of the eight low-frequency liquidity measures for each exchange rate with the (alternative to
effective cost) high-frequency liquidity for the same exchange rate. High-frequency liquidity measures include bid-ask spread, price
impact, return reversal, and price dispersion. Bid-ask spread denotres the monthly average of daily proportional bid-ask spreads. The
proportional spread is measured as in Equation (2). Price impact is monthly average of daily estimated coefficients of contemporaneous
order flow in a regression of one-minute returns on the contemporaneous and lagged order flow (Equation (3)). Return reversal is
24
monthly average of daily sum of estimated coefficients of lagged and order flow (1-5 lags) in the same regression. Price dispersion is
estimated using two-scale realized volatility (TSRV). The monthly low-frequency spread proxies are: Roll from Roll from Roll (1984),
BA is the relative bid-ask spread, BPW from Bao, Pan, and Wang (2011), CS from Corwin and Schultz (2012), Gibbs from Hasbrouck
(2009), Volatility, EffTick from Holden (2009), and LOT from Lesmond, Ogden, and Trzcinka (1999). Bold numbers are statistically
significant at the 5% level (GMM based test using a Newey-West covariance estimator with 4 lags). The sample covers 65 months,
January 2007 May 2012.

Roll

BPW

BA

CS

Gibbs

Volatility

Panel A. Whole sample (Jan 2007 - May 2012), 65 months

Bid-ask spread
0.595
0.552
0.702
0.909
0.888
0.936
Price impact
0.553
0.588
0.570
0.849
0.857
0.891
Return reversal
-0.610 -0.590 -0.706 -0.887 -0.835
-0.922
Price dispersion 0.719
0.682
0.689
0.932
0.901
0.986
Panel B. Pre-crisis (Jan 2007 - Jun 2008), 18 months
Bid-ask spread
0.511
0.302
0.676
0.863
0.774
0.885
Price impact
0.408
0.181
0.717
0.780
0.603
0.766
Return reversal
-0.309 -0.079 -0.526 -0.728 -0.446
-0.635
Price dispersion 0.661
0.414
0.746
0.924
0.835
0.943
Panel C. Financial crisis (Jul 2008 - Dec 2009), 18 months
Bid-ask spread
0.609
0.613
0.822
0.911
0.918
0.950
Price impact
0.566
0.627
0.779
0.871
0.903
0.928
Return reversal
-0.671 -0.711 -0.809 -0.886 -0.894
-0.955
Price dispersion 0.750
0.806
0.724
0.913
0.876
0.988
Panel D. European sovereign debt crisis (Jan 2010 - May 2012), 29 months
Bid-ask spread
0.457
0.071
0.324
0.879
0.769
0.795
Price impact
0.301
0.128
0.288
0.733
0.607
0.631
Return reversal
-0.471 -0.200 -0.229 -0.773 -0.625
-0.774
Price dispersion 0.644
0.224
0.445
0.886
0.885
0.972

EffTick

LOT

-0.010
0.037
0.004
-0.055

0.620
0.597
-0.603
0.647

-0.150
-0.069
0.045
-0.236

0.004
-0.021
0.102
0.016

0.052
0.010
-0.079
0.022

0.715
0.692
-0.714
0.754

0.090
0.174
-0.105
0.001

0.143
0.218
-0.137
0.233

Table 9: Correlations between the across-currencies LF liquidities and (alternative to the

EC) HF liquidity measures. The table shows the time-series correlations of the eight across-currencies
LF liquidities with the across-currencies (alternative to effective cost) HF liquidity measures over the whole
period (Panel A) and over three subperiods: pre-crisis, January 2007 June 2008 (Panel B), financial crisis, July 2008 December 2009 (Panel C) and European sovereign debt crisis, January 2010 May 2012
(Panel D). HF liquidity measures include bid-ask spread, price impact, return reversal, and price dispersion.
Bid-ask spread denotes the monthly average of daily proportional bid-ask spreads. The proportional spread
is measured as in Equation (2). Price impact is monthly average of daily estimated coefficients of contemporaneous order flow in a regression of one-minute returns on the contemporaneous and lagged order flow
(Equation (3)). Return reversal is monthly average of daily sum of estimated coefficients of lagged and
order flow (1-5 lags) in the same regression. Price dispersion is estimated using two-scale realized volatility
(TSRV). The monthly low-frequency spread proxies are: Roll from Roll from Roll (1984), BA is the relative
bid-ask spread, BPW from Bao, Pan, and Wang (2011), CS from Corwin and Schultz (2012), Gibbs from
Hasbrouck (2009), Volatility, EffTick from Holden (2009), and LOT from Lesmond, Ogden, and Trzcinka
(1999). The across-currencies measures are based on PCA (within measures) across the individual FX rate
liquidites. Bold numbers are statistically significant at the 5% level (GMM based test using a Newey-West
covariance estimator with 4 lags). The sample covers 65 months, January 2007 May 2012.

25

26

AUD/USD

EUR/CHF

pB /

0.02136

0.02695

0.02184

0.00150
0.00060
0.00030

-0.1507
-0.0086
0.2144
0.4558
0.5588
0.5908
0.6025
0.6233
0.6279
0.6283
0.6285

EUR/GBP

0.02470

0.00332
0.00077
0.00038

-0.1494
0.0805
0.2452
0.4418
0.6041
0.6495
0.6640
0.6706
0.6725
0.6725
0.6728

EUR/JPY

0.01537

0.00202
0.00030
0.00015

-0.0060
-0.0522
-0.0204
0.3414
0.5432
0.5768
0.5868
0.6003
0.6016
0.6017
0.6018

EUR/USD

0.01551

0.00189
0.00030
0.00015

-0.1328
-0.1374
-0.0022
0.4649
0.6685
0.7101
0.7280
0.7492
0.7515
0.7522
0.7523

GBP/USD

0.02038

0.00228
0.00052
0.00026

-0.0961
-0.2114
-0.1344
0.3919
0.5617
0.5983
0.6081
0.6167
0.6182
0.6193
0.6193

USD/CAD

0.02189

0.00268
0.00061
0.00031

-0.0676
-0.1156
0.1213
0.5875
0.7211
0.7454
0.7526
0.7556
0.7457
0.7456
0.7452

USD/CHF

Table 10: Calibrating the prior for the standard deviation of transaction cost in the Gibbs procedure. Panel A of the table
shows time-series correlations of the monthly Gibbs estimates (from Hasbrouck (2009)) based on different priors for the
standard
p deviation of transaction cost (c ) with the effective cost for each exchange rate. The half-normal distribution implies
c D =2Ec  1:25Ec, where Ec is the mean of the transaction cost. Effective cost denotes the monthly average of
daily effective cost estimates. Bold numbers are statistically significant at the 5% level (GMM based test using a Newey-West
covariance estimator with 4 lags). Panel B of the table shows the mean value of the alternative EC prior specifications, used
in the Gibbs estimation, for each exchange rate. p A and p B denote the monthly averages of log ask and log bid prices,
respectively. The sample covers 65 months, January 2007 - May 2012.

.p A

Panel A. Correlations of the Gibbs estimates with the EC

0.00013
-0.0624
0.0414
0.00063
-0.1439
0.3627
0.00125
-0.0824
0.5624
0.00313
0.3279
0.7303
0.00626
0.6484
0.7851
0.00940
0.7604
0.7892
0.01253
0.7947
0.7925
0.03132
0.8152
0.7903
0.06265
0.8140
0.7901
0.12530
0.8145
0.7900
1.25300
0.8148
0.7899
Panel B. Mean values of the alternative priors for c
1.25Roll/2, if Roll>0, 0.005 otherwise
0.00436
0.00159
1:25.p A p B /
0.00058
0.00092
A
B
1:25.p
p /=2
0.00029
0.00046
q

Prior for c

0.01911

0.00256
0.00046
0.00023

-0.0183
0.0796
0.2544
0.5186
0.6208
0.6347
0.6378
0.6397
0.6428
0.6428
0.6429

USD/JPY

HF method
Simple average
Trimmed mean

EC
0.999
0.999

LF methods
Roll
0.940
0.924

BPW
0.488
0.382

BA
0.986
0.992

CS
0.999
0.997

Gibbs
0.999
0.997

Volatility
0.998
0.998

EffTick
0.445
0.586

LOT
0.894
0.919

Table 11: Correlations of the across-currencies LF and EC measures based on the

PCA with the simple average and trimmed mean. The table shows the time-series correlations
of the across-currencies liquidities based on the PCA with the across-currencies liquidities based on the
simple and trimmed averaging. Effective cost denotes the monthly average of daily effective cost estimates.
The monthly low-frequency spread proxies are: Roll from Roll from Roll (1984), BA is the relative bid-ask
spread, BPW from Bao, Pan, and Wang (2011), CS from Corwin and Schultz (2012), Gibbs from Hasbrouck
(2009), Volatility, EffTick from Holden (2009), and LOT from Lesmond, Ogden, and Trzcinka (1999). The
across-currencies measures are based on PCA (within measures) across the individual FX rate liquidites.
Bold numbers are statistically significant at the 5% level (GMM based test using a Newey-West covariance
estimator with 4 lags). The sample covers 65 months, January 2007 May 2012.

27

Roll

BPW

BA

CS

Gibbs

Volatility

EffTick

Panel A. Whole sample (Jan 2007 - May 2012), 65 months

Simple mean
0.529 0.210 0.700 0.896 0.868
0.932
-0.103
Trimmed mean 0.464 0.008 0.686 0.897 0.864
0.922
-0.080
Panel B. Pre-crisis (Jan 2007 - Jun 2008), 18 months
Simple mean
0.620 0.449 0.683 0.842 0.798
0.896
0.086
Trimmed mean 0.642 0.409 0.672 0.864 0.834
0.894
-0.095
Panel C. Financial crisis (Jul 2008 - Dec 2009), 18 months
Simple mean
0.397 0.012 0.823 0.903 0.890
0.939
-0.055
Trimmed mean 0.325 -0.175 0.820 0.899 0.876
0.932
0.017
Panel D. European sovereign debt crisis (Jan 2010 - May 2012), 29 months
Simple mean
0.522 0.349 0.328 0.832 0.741
0.813
-0.173
Trimmed mean 0.440 0.224 0.328 0.784 0.682
0.760
-0.066

LOT
0.740
0.713
0.392
0.329
0.819
0.789
0.448
0.347

Table 12: Correlations between the across-currencies LF liquidities based on the simple and
trimmed mean with the EC. The table shows times-series correlations of the across-currencies LF
liquidities based on the simple and trimmed mean with the across-currencies effective cost over the whole
period and over three subperiods: pre-crisis (Jan 2007 - Jun 2008), financial crisis (Jul 2008 - Dec 2009)
and European sovereign debt crisis (Jan 2010 - May 2012). The monthly low-frequency spread proxies are:
Roll from Roll (1984), BA is the relative bid-ask spread, BPW from Bao, Pan, and Wang (2011), CS from
Corwin and Schultz (2012), Gibbs from Hasbrouck (2009), Volatility, EffTick from Holden (2009), and
LOT from Lesmond, Ogden, and Trzcinka (1999). The across-currencies measures are based on the simple
and trimmed mean (within measures) across individual FX rate liquidites. Bold numbers are statistically
significant at the 5% level. * means that the correlation is statistically significantly different at the 5%
level from all other correlations in the same row. Both significance tests are the GMM based tests using a
Newey and West (1987) covariance estimator with 4 lags. **Idf stands for insignificantly different from.
The sample covers 65 months, January 2007 May 2012.

28

Roll
AUD/USD
EUR/CHF
EUR/GBP
EUR/JPY
EUR/USD
GBP/USD
USD/CAD
USD/CHF
USD/JPY
Average

0.617
-0.041
0.120
0.435
0.233
-0.072
-0.106
-0.047
0.326
0.163

BPW
0.660
-0.281
-0.137
0.500
0.225
-0.307
-0.126
-0.265
0.389
0.073

BA

CS

0.353
0.180
0.226
0.143
0.197
0.253
0.034
0.231
0.349
0.219

0.619
0.635
0.313
0.533
0.323
0.453
0.094
0.335
0.421
0.414

Gibbs
0.610
0.546
0.252
0.447
0.338
0.208
0.352
0.402
0.399
0.395

Volatility EffTick LOT

0.809
0.726
0.494
0.540
0.564
0.656
0.429
0.528
0.560
0.590

0.007
0.315
-0.112
-0.023
0.103
0.074
-0.076
0.001
-0.229
0.007

0.541
-0.038
0.072
0.351
0.210
0.337
-0.119
0.342
0.379
0.231

Table 13: Correlations between changes in the FX rate LF liquidities and changes
in the EC. The table shows the time-series correlations of changes in the eight lowfrequency liquidity measures for each exchange rate with changes in the effective cost
measure for the same exchange rate. Effective cost denotes the monthly average of daily
effective cost estimates. The monthly low-frequency spread proxies are: Roll from Roll
from Roll (1984), BA is the relative bid-ask spread, BPW from Bao, Pan, and Wang
(2011), CS from Corwin and Schultz (2012), Gibbs from Hasbrouck (2009), Volatility,
EffTick from Holden (2009), and LOT from Lesmond, Ogden, and Trzcinka (1999). Bold
numbers are statistically significant at the 5% level (GMM based test using a NeweyWest covariance estimator with 4 lags). The sample covers 65 months, January 2007
May 2012.

29

Roll

BPW

BA

CS

Gibbs

Volatility

EffTick

LOT

Whole sample (Jan 2007 - May 2012), 65 months

0.426 0.462 0.369 0.621 0.585
0.790 -0.039 0.394
Pre-crisis (Jan 2007 - Jun 2008), 18 months
0.562 0.546 0.585 0.730 0.764
0.798 -0.488 -0.055
Financial crisis (Jul 2008 - Dec 2009), 18 months
0.461 0.630 0.624 0.609 0.481
0.848 -0.126 0.464
European sovereign debt crisis (Jan 2010 - May 2012), 29 months
0.402 0.006 -0.084 0.767 0.802
0.737
0.335 0.357
Table 14: Correlations between changes in the across-currencies LF liquidities and
changes the EC. The table shows times-series correlations between changes in the acrosscurrencies LF liquidities and changes in the across-currencies effective cost over the
whole period and over three subperiods: pre-crisis (Jan 2007 June 2008), financial
crisis (Jul 2008 Dec 2009) and European sovereign debt crisis (Jan 2010 May 2012).
The monthly low-frequency spread proxies are: Roll from Roll (1984), BA is the relative
bid-ask spread, BPW from Bao, Pan, and Wang (2011), CS from Corwin and Schultz
(2012), Gibbs from Hasbrouck (2009), Volatility, EffTick from Holden (2009), and LOT
from Lesmond, Ogden, and Trzcinka (1999). The across-currencies measures are based
on the PCA (within measures) across individual FX rate liquidites. Bold numbers are
statistically significant at the 5% level (GMM based test using a Newey and West (1987)
covariance estimator with 4 lags). The sample covers 65 months, January 2007 May
2012.

30

(1)
Intercept
LF liquidity
Vol

(2)

-0.001
0.058
[-0.014] [0.676]
0.877
[13.626]
0.893
[6.432]

CS*
Gibbs**

(3)

(4)

-0.007
[-0.140]

-0.007
[-0.140]

0.893
[17.769]
0.330
[2.334]
0.372
[3.221]

0.893
[17.769]

GibbsC
CSCC
Adj. R-squared

0.566

0.550

0.578

0.421
[3.472]
0.245
[1.796]
0.578

Table 15: Quantile regressions of the across-currencies EC on the LF liquidities. The table
shows the output of median quantile regressions of the across-currencies effective cost on
(1) the systematic LF liquidity, obtained from the PCA across FX rates as well as best LF
liquidities, (2) the across-currencies volatility, (3)-(4) the rotated best across-currencies
low-frequency measures. The best across-currencies low-frequency measures include:
Volatility, CS (from Corwin and Schultz (2012)), Gibbs (Hasbrouck (2009)). All the
across-currencies liquidity measures are obtained from the PCA (within measures) across
individual FX rates liquidites and standardized. * denotes the second factor in the rotation
[Volatility, CS, Gibbs]. ** denotes the third factor in the rotation [Volatility, CS, Gibbs].
C
denotes the second factor in the rotation [Volatility, Gibbs, CS]. CC denotes the third
factor in the rotation [Volatility, Gibbs, CS]. The t-statistics is shown in the brackets. Bold
numbers are statistically significant at the 5% level. The sample is January 2007 May
2012, 65 months.

31

32

-0.224
-0.083
0.020
0.663
-0.285
0.249
-0.235
0.472
0.078

EC
Roll
BPW
BA
CS
Gibbs
Volatility
EffTick
LOT

0.602
-0.295
0.199
-0.411
0.646
-0.055
0.625
-0.103
0.223

0.256
0.370
0.382
0.373
0.225
0.281
0.215
0.143
0.349

EUR/CHF

-0.066
0.265
-0.050
0.074
0.006
-0.426
0.137
0.224
0.042

0.356
0.071
-0.209
0.413
0.365
0.311
0.330
0.620
0.020

EUR/GBP

EUR/USD

GBP/USD

First principle loadings

0.321
0.346
0.369
0.467
0.337
0.009
0.444
0.040
-0.369
0.389
0.391
0.366
0.351
0.357
0.354
0.354
0.370
0.341
0.360
0.373
0.375
-0.045
-0.006
-0.259
0.485
0.381
0.445
Second principle loadings
0.352
-0.206
-0.131
-0.102
0.453
0.442
0.146
0.621
0.284
0.015
-0.004
0.227
-0.171
0.262
-0.245
0.378
-0.163
-0.356
-0.241
0.143
-0.080
0.465
-0.227
0.367
-0.072
-0.160
-0.138

EUR/JPY

-0.309
0.519
0.437
0.279
-0.231
0.164
-0.264
0.416
0.595

0.343
0.161
-0.265
0.032
0.328
0.350
0.346
-0.386
-0.113

USD/CAD

0.484
0.194
0.516
-0.452
0.502
-0.357
0.546
-0.012
0.683

0.309
0.369
0.161
0.350
0.298
0.325
0.282
0.143
0.047

USD/CHF

-0.264
-0.343
-0.115
0.228
-0.198
0.550
-0.288
-0.376
0.268

0.339
0.397
0.415
0.317
0.356
0.302
0.325
0.265
0.297

USD/JPY

90.12%
53.89%
54.81%
69.42%
72.03%
71.28%
82.67%
35.12%
74.05%

76.71%
34.34%
35.55%
54.75%
59.81%
59.54%
69.05%
20.16%
40.89%

Cum. % explained

shows principle component loadings for each exchange rate obtained by conducting the PCA across the FX rate liquidities. The Principal Component
Analysis is repeated for each liquidity measure. Effective cost (EC) high-frequency measure denotes the monthly average of daily effective cost
estimates. The low-frequency measures are: Roll from Roll (1984), BA is the relative bid-ask spread, BPW from Bao, Pan, and Wang (2011), CS from
Corwin and Schultz (2012), Gibbs from Hasbrouck (2009), Volatility, EffTick from Holden (2009), and LOT from Lesmond, Ogden, and Trzcinka
(1999). The sample covers 65 months, January 2007 May 2012.

Table 16: Principle component loadings across currencies. Given a standardized monthly measure of liquidity, each row of the table

0.349
0.454
0.455
0.169
0.344
0.356
0.362
0.535
0.442

EC
Roll
BPW
BA
CS
Gibbs
Volatility
EffTick
LOT

AUD/USD

33

0.181
0.087
-0.060

0.196
-0.014
0.095

EUR/CHF
0.178
0.012
0.115

EUR/GBP
0.173
0.129
-0.063

EUR/JPY
0.201
0.004
0.055

EUR/USD
0.180
0.001
-0.032

GBP/USD
0.186
0.080
-0.085

USD/CAD

0.224
-0.076
-0.010

USD/CHF

0.197
-0.039
-0.058

USD/JPY

59.06%
69.47%
74.89%

Cum. % explained

(across the best LF measures) loading for each exchange rate. The sample covers 65 months, January 2007 May 2012.

Table 17: Principle component loadings across the best LF liquidity measures and currencies: Average loading for FX
rates. Principle component loadings across the best FX liquidity measures and FX rates are extracted by the PCA. The table reports the average

PC1
PC2
PC3

AUD/USD

PC1
PC2
PC3

CS

Gibbs

Volatility

Cum. % explained

0.202
-0.138
-0.097

0.170
0.249
-0.028

0.200
-0.050
0.111

59.06%
69.47%
74.89%

Table 18: Principle component loadings across the best LF liquidity measures and
currencies: Average loading for liquidity measures. Principle component loadings across the
best FX liquidity measures and FX rates are extracted by the PCA. The table reports the average (across
nine currency pairs) loading for each LF liquidity measure. The best FX liquidity measures are: CS from
Corwin and Schultz (2012), Gibbs from Hasbrouck (2009) and Volatility. The sample covers 65 months,
January 2007 May 2012.

34

CS
Gibbs
Volatility
Systematic
40 FX rates

CS

Gibbs

Volatility

Systematic

1
0.808
0.838
0.923
0.940

1
0.889
0.948
0.962

1
0.969
0.974

1
0.968

Table 19: Correlations between the across-currencies and systematic LF measures

based on the nine and forty FX rates over 1991-2012. The table shows correlations between
the across-currencies LF liquidities and systematic LF liquidity based on the nine FX rates (used in the
core paper analysis). The across-currencies CS, Gibbs, and Volatility liquidities are obtained from the PCA
(within measures) across the individual FX rate liquidites. The systematic liquidity measure is obtained
from the PCA across FX rates as well as across CS, Gibbs, and Volatility liquidities. The last row reports
the correlations of the across-currencies and systematic LF liquidities based on the nine FX rates with
the ones based on the forty FX rates. the Bold numbers are statistically significant at the 5% level. The
significance test is the GMM based test using a Newey and West (1987) covariance estimator with 4 lags.
Correlations are computed using 257 non-overlapping monthly observations. The sample is January 1991
May 2012, 257 months.

35

36

1.003
0.990
0.240
0.707
1.337

1.795
1.491
0.890
0.953
3.722

0.772
0.751
0.169
0.566
1.165

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

EUR/GBP

EUR/JPY

EUR/USD

GBP/USD

USD/CAD

0.388
0.373
0.125
0.134
0.836

Whole sample (Jan 2007 - May 2012, 65 months)

0.760
0.460
0.292
0.693
1.074
0.693
0.446
0.281
0.576
1.008
0.260
0.132
0.053
0.381
0.406
0.453
0.263
0.213
0.337
0.632
1.596
0.853
0.458
1.879
2.326
Pre-crisis (Jan 2007-Jun 2008, 18 months)
0.320
0.586
0.325
0.280
0.495
1.017
0.304
0.578
0.330
0.280
0.472
1.062
0.051
0.093
0.049
0.006
0.129
0.245
0.262
0.462
0.263
0.269
0.337
0.709
0.433
0.718
0.403
0.292
0.691
1.387
Financial crisis (Jun 2008-Dec 2009, 18 months)
0.429
1.058
0.554
0.340
1.159
1.534
0.393
1.037
0.494
0.335
1.074
1.506
0.132
0.297
0.166
0.071
0.448
0.435
0.290
0.660
0.348
0.257
0.561
0.973
0.707
1.596
0.853
0.458
1.879
2.326
European sovereign-debt crisis (Jan 2010-May 2012, 29 months)
0.405
0.683
0.486
0.271
0.528
0.825
0.409
0.692
0.476
0.268
0.531
0.767
0.138
0.115
0.058
0.036
0.088
0.154
0.134
0.453
0.416
0.213
0.360
0.632
0.836
1.088
0.617
0.345
0.733
1.128

EUR/CHF

0.489
0.477
0.069
0.389
0.716

0.527
0.519
0.110
0.393
0.719

0.392
0.368
0.058
0.334
0.505

0.473
0.461
0.094
0.334
0.719

USD/CHF

0.365
0.337
0.070
0.259
0.463

0.495
0.469
0.086
0.381
0.669

0.363
0.362
0.049
0.305
0.459

0.401
0.406
0.091
0.259
0.669

USD/JPY

FX liquidity measure over the whole period and over three subperiods: pre-crisis (Jan 2007 - Jun 2008), financial crisis (Jul 2008 - Dec 2009) and
European sovereign-debt crisis (Jan 2010 - May 2012). Effective cost denotes the monthly average of daily effective cost estimates. Effective cost is
measured in bps. The sample covers 65 months, January 2007 - May 2012.

Table 20: Effective cost: descriptive statistics over Jan 2007 - May 2012. This table shows summary statistics for effective cost

1.119
0.953
0.652
0.566
3.722

Mean
Median
Std. dev.
Min
Max

AUD/USD

37

0.547
0.519
0.434
0.000
1.674
16.7%

1.173
1.184
1.448
0.000
6.189
27.8%

0.493
0.508
0.442
0.000
1.426
27.6%

Mean
Median
Std. dev.
Min
Max
% positive

Mean
Median
Std. dev.
Min
Max
% positive

Mean
Median
Std. dev.
Min
Max
% positive

EUR/GBP

EUR/JPY

EUR/USD

GBP/USD

USD/CAD

0.253
0.144
0.321
0.000
1.595
29.2%

Whole sample (Jan 2007 - May 2012, 65 months)

0.239
0.530
0.323
0.302
0.364
0.122
0.418
0.229
0.331
0.246
0.280
0.570
0.384
0.296
0.397
0.000
0.000
0.000
0.000
0.000
1.326
2.581
1.383
1.270
1.576
40.0%
32.3%
40.0%
38.5%
33.8%
Pre-crisis (Jan 2007-Jun 2008, 18 months)
0.174
0.202
0.409
0.206
0.248
0.338
0.121
0.159
0.264
0.194
0.233
0.300
0.229
0.246
0.434
0.197
0.251
0.362
0.000
0.000
0.000
0.000
0.000
0.000
0.891
1.033
1.251
0.651
0.735
1.181
38.9%
27.8%
33.3%
33.3%
38.9%
33.3%
Financial crisis (Jun 2008-Dec 2009, 18 months)
0.301
0.290
0.795
0.455
0.347
0.410
0.173
0.191
0.836
0.347
0.345
0.026
0.355
0.358
0.728
0.485
0.380
0.539
0.000
0.000
0.000
0.000
0.000
0.000
1.272
1.326
2.581
1.383
1.270
1.576
27.8%
44.4%
27.8%
38.9%
44.4%
50.0%
European sovereign debt crisis (Jan 2010-May 2012, 29 months)
0.273
0.230
0.440
0.313
0.308
0.351
0.149
0.098
0.418
0.157
0.363
0.267
0.348
0.249
0.493
0.388
0.267
0.319
0.000
0.000
0.000
0.000
0.000
0.000
1.595
0.742
2.276
1.300
0.873
1.068
24.1%
44.8%
34.5%
44.8%
34.5%
24.1%

EUR/CHF

0.372
0.295
0.465
0.000
2.005
41.4%

0.623
0.637
0.479
0.000
1.449
27.8%

0.319
0.260
0.348
0.000
1.264
33.3%

0.427
0.340
0.451
0.000
2.005
35.4%

USD/CHF

0.288
0.291
0.280
0.000
0.766
37.9%

0.580
0.466
0.674
0.000
1.920
38.9%

0.433
0.388
0.422
0.000
1.648
27.8%

0.409
0.326
0.466
0.000
1.920
35.4%

USD/JPY

over the whole period and over three subperiods: pre-crisis (Jan 2007 - Jun 2008), financial crisis (Jul 2008 - Dec 2009) and European sovereign debt
crisis (Jan 2010 - May 2012). The Roll percentage spread estimates (from Roll (1984)) are computed as square root of negative consecutive price
changes autocovariance, if the autocovariance is positive, and zero, otherwise. % negative denotes the percentage of positive monthly autocovariance
estimates. The Roll is measured in %. The sample covers 65 months, January 2007 - May 2012.

Table 21: Roll spread: descriptive statistics over Jan 2007 - May 2012. This table shows summary statistics for Roll liquidity measure

0.696
0.551
0.884
0.000
6.189
24.6%

Mean
Median
Std. dev.
Min
Max
% positive

AUD/USD

38

0.111
0.068
0.179
-0.119
0.701

0.777
0.351
2.250
-0.913
9.575

0.066
0.064
0.219
-0.679
0.509

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

EUR/GBP

EUR/JPY

EUR/USD

GBP/USD

USD/CAD

0.027
0.005
0.117
-0.330
0.636

Whole sample (Jan 2007 - May 2012, 65 months)

-0.011
0.120
0.030
0.006
0.047
0.004
0.044
0.013
0.027
0.015
0.165
0.314
0.153
0.130
0.152
-1.001
-0.334
-0.475
-0.424
-0.540
0.439
1.666
0.478
0.403
0.621
Pre-crisis (Jan 2007-Jun 2008, 18 months)
0.015
0.013
0.071
0.006
0.021
0.044
0.004
0.007
0.018
0.010
0.014
0.025
0.050
0.071
0.137
0.050
0.049
0.108
-0.039
-0.086
-0.107
-0.133
-0.057
-0.097
0.198
0.267
0.391
0.106
0.135
0.349
Financial crisis (Jun 2008-Dec 2009, 18 months)
0.043
-0.065
0.257
0.057
-0.051
0.057
0.007
0.011
0.175
0.030
0.030
-0.010
0.114
0.294
0.445
0.223
0.227
0.248
-0.134
-1.001
-0.222
-0.475
-0.424
-0.540
0.405
0.439
1.666
0.478
0.403
0.621
European sovereign debt crisis (Jan 2010-May 2012, 29 months)
0.025
0.009
0.065
0.027
0.033
0.043
0.006
0.002
0.044
0.006
0.033
0.018
0.146
0.062
0.277
0.145
0.056
0.092
-0.330
-0.140
-0.334
-0.274
-0.060
-0.124
0.636
0.138
1.295
0.423
0.190
0.285

EUR/CHF

0.038
0.022
0.258
-0.739
1.005

0.107
0.102
0.225
-0.364
0.525

0.028
0.017
0.123
-0.159
0.400

0.054
0.029
0.218
-0.739
1.005

USD/CHF

0.019
0.021
0.084
-0.279
0.147

0.156
0.054
0.359
-0.317
0.921

0.078
0.040
0.165
-0.085
0.679

0.073
0.027
0.219
-0.317
0.921

USD/JPY

Table 22: BPW measure: descriptive statistics over Jan 2007 - May 2012. This table shows summary statistics for BPW liquidity
measure over the whole period and over three subperiods: pre-crisis (Jan 2007 - Jun 2008), financial crisis (Jul 2008 - Dec 2009) and European
sovereign debt crisis (Jan 2010 - May 2012). The BPW estimates (from Bao, Pan, and Wang (2011) are measured as minus autocovariance of
consecutive price changes. The BPW is measured in bps. The sample covers 65 months, January 2007 - May 2012.

0.275
0.076
1.213
-0.913
9.575

Mean
Median
Std. dev.
Min
Max

AUD/USD

39

4.521
4.583
0.477
3.614
5.525

5.021
4.600
1.169
3.531
7.009

4.386
4.198
0.765
3.345
5.846

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

EUR/GBP

EUR/JPY

EUR/USD

GBP/USD

USD/CAD

7.375
7.806
1.763
4.528
11.014

Whole sample (Jan 2007 - May 2012, 65 months)

4.804
6.139
2.385
2.423
4.163
4.723
6.123
2.392
2.305
4.163
0.833
0.959
0.453
0.442
0.391
3.310
4.191
1.530
1.677
3.068
6.952
8.179
3.540
3.816
5.085
Pre-crisis (Jan 2007-Jun 2008, 18 months)
5.129
3.891
5.087
1.976
2.052
4.236
4.874
3.925
5.068
2.015
2.039
4.196
0.639
0.244
0.520
0.230
0.142
0.357
4.528
3.310
4.191
1.530
1.821
3.443
6.568
4.343
6.123
2.432
2.328
4.862
Financial crisis (Jun 2008-Dec 2009, 18 months)
7.658
5.400
6.560
2.594
2.812
4.262
7.977
5.723
6.658
2.762
2.886
4.255
1.031
0.935
0.893
0.531
0.462
0.267
5.722
3.670
5.152
1.642
1.964
3.740
9.298
6.952
7.934
3.540
3.816
4.732
European sovereign debt crisis (Jan 2010-May 2012, 29 months)
8.593
5.001
6.530
2.509
2.412
4.056
8.440
5.006
6.537
2.587
2.331
4.026
1.176
0.463
0.686
0.337
0.344
0.455
5.874
4.317
5.237
1.720
1.677
3.068
11.014
6.041
8.179
3.127
3.141
5.085

EUR/CHF

5.866
5.852
1.059
3.547
7.634

5.106
5.044
0.841
3.815
7.100

3.156
2.881
0.695
2.450
4.667

4.905
5.043
1.448
2.450
7.634

USD/CHF

3.751
3.638
0.687
2.565
5.243

3.997
3.816
0.636
3.180
4.960

3.257
3.228
0.459
2.585
4.028

3.682
3.571
0.671
2.565
5.243

USD/JPY

measure over the whole period and over three subperiods: pre-crisis (Jan 2007 - Jun 2008), financial crisis (Jul 2008 - Dec 2009) and European
sovereign debt crisis (Jan 2010 - May 2012). Bid-ask percentage spread is the average over daily relative bid-ask estimates. The BA is measured in
bps. The sample covers 65 months, January 2007 - May 2012.

Table 23: Bid-ask spread: descriptive statistics over Jan 2007 - May 2012. This table shows summary statistics for BA liquidity

4.599
4.447
0.867
3.345
7.009

Mean
Median
Std. dev.
Min
Max

AUD/USD

40

0.158
0.153
0.059
0.086
0.266
37.11%

0.289
0.288
0.122
0.102
0.526
39.49%

0.155
0.151
0.045
0.092
0.267
40.22%

Mean
Median
Std. dev.
Min
Max
% zero

Mean
Median
Std. dev.
Min
Max
% zero

Mean
Median
Std. dev.
Min
Max
% zero

EUR/GBP

EUR/JPY

EUR/USD

GBP/USD

USD/CAD

0.115
0.097
0.062
0.052
0.436
28.62%

Whole sample (Jan 2007 - May 2012, 65 months)

0.133
0.190
0.144
0.136
0.155
0.132
0.169
0.133
0.134
0.139
0.057
0.088
0.056
0.058
0.056
0.040
0.042
0.038
0.033
0.065
0.277
0.462
0.298
0.290
0.309
36.49%
38.52%
37.97%
39.93%
36.17%
Pre-crisis (Jan 2007-Jun 2008, 18 months)
0.083
0.095
0.147
0.100
0.097
0.135
0.074
0.090
0.145
0.094
0.096
0.124
0.030
0.044
0.084
0.039
0.037
0.055
0.052
0.046
0.040
0.042
0.033
0.066
0.179
0.210
0.374
0.188
0.173
0.308
34.40%
34.47%
35.55%
33.01%
40.04%
31.18%
Financial crisis (Jun 2008-Dec 2009, 18 months)
0.117
0.174
0.237
0.181
0.190
0.198
0.101
0.172
0.244
0.175
0.187
0.197
0.048
0.069
0.095
0.064
0.063
0.058
0.060
0.040
0.100
0.086
0.068
0.099
0.220
0.277
0.463
0.297
0.311
0.304
27.20%
36.76%
42.78%
35.37%
44.21%
41.67%
European sovereign debt crisis (Jan 2010-May 2012, 29 months)
0.133
0.132
0.186
0.148
0.128
0.140
0.106
0.135
0.168
0.134
0.135
0.130
0.076
0.037
0.073
0.040
0.040
0.039
0.052
0.045
0.099
0.084
0.065
0.084
0.433
0.214
0.444
0.234
0.204
0.244
26.64%
37.77%
38.04%
42.17%
36.90%
35.90%

EUR/CHF

0.166
0.161
0.048
0.068
0.264
34.61%

0.201
0.191
0.051
0.144
0.323
31.74%

0.129
0.115
0.064
0.043
0.258
34.32%

0.165
0.161
0.060
0.042
0.323
33.64%

USD/CHF

0.124
0.126
0.038
0.053
0.210
33.96%

0.208
0.191
0.075
0.122
0.396
37.85%

0.142
0.139
0.066
0.049
0.311
37.26%

0.153
0.145
0.068
0.049
0.396
36.04%

USD/JPY

(CS) liquidity measure over the whole period and over three subperiods: pre-crisis (Jan 2007 - Jun 2008), financial crisis (Jul 2008 - Dec 2009) and
European sovereign debt crisis (Jan 2010 - May 2012). The CS spread estimates are computed as in Corwin and Schultz (2012). % zero denotes the
mean monthly proportion of zero 2-day CS estimates. The CS is measured in %. The sample covers 65 months, January 2007 - May 2012.

Table 24: CS measure: descriptive statistics over Jan 2007 - May 2012. This table shows summary statistics for Corwin-Schultz

0.194
0.167
0.107
0.078
0.690
39.06%

Mean
Median
Std. dev.
Min
Max
% zero

AUD/USD

41

0.291
0.224
0.157
0.155
0.757

0.549
0.443
0.405
0.139
1.720

0.306
0.270
0.127
0.103
0.698

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

EUR/GBP

EUR/JPY

EUR/USD

GBP/USD

USD/CAD

0.167
0.128
0.136
0.007
0.761

Whole sample (Jan 2007 - May 2012, 65 months)

0.193
0.330
0.257
0.238
0.265
0.179
0.244
0.210
0.197
0.236
0.087
0.218
0.148
0.118
0.127
0.061
0.081
0.075
0.076
0.083
0.507
1.109
0.888
0.636
0.744
Pre-crisis (Jan 2007-Jun 2008, 18 months)
0.111
0.149
0.238
0.171
0.183
0.245
0.091
0.120
0.215
0.155
0.178
0.238
0.066
0.100
0.147
0.084
0.074
0.103
0.044
0.061
0.081
0.075
0.076
0.104
0.327
0.507
0.580
0.350
0.331
0.556
Financial crisis (Jun 2008-Dec 2009, 18 months)
0.162
0.243
0.476
0.343
0.332
0.347
0.116
0.211
0.370
0.291
0.308
0.319
0.109
0.088
0.305
0.202
0.149
0.156
0.035
0.146
0.139
0.110
0.171
0.185
0.363
0.423
1.109
0.888
0.636
0.744
European sovereign debt crisis (Jan 2010-May 2012, 29 months)
0.204
0.188
0.297
0.256
0.214
0.226
0.177
0.175
0.240
0.213
0.185
0.208
0.171
0.060
0.136
0.107
0.083
0.096
0.007
0.115
0.125
0.112
0.083
0.083
0.761
0.354
0.697
0.559
0.410
0.493

EUR/CHF

0.258
0.226
0.128
0.107
0.655

0.359
0.319
0.193
0.126
0.901

0.198
0.183
0.099
0.102
0.486

0.270
0.234
0.153
0.102
0.901

USD/CHF

0.200
0.153
0.115
0.100
0.667

0.365
0.322
0.181
0.128
0.840

0.223
0.220
0.111
0.071
0.550

0.252
0.228
0.151
0.071
0.840

USD/JPY

measure over the whole period and over three subperiods: pre-crisis (Jan 2007 - Jun 2008), financial crisis (Jul 2008 - Dec 2009) and European
sovereign debt crisis (Jan 2010 - May 2012). The Gibbs spread estimates are computed as in Hasbrouck (2009). The Gibbs is measured in %. The
sample covers 65 months, January 2007 - May 2012.

Table 25: Gibbs measure: descriptive statistics over Jan 2007 - May 2012. This table shows summary statistics for Gibbs liquidity

0.369
0.276
0.264
0.103
1.720

Mean
Median
Std. dev.
Min
Max

AUD/USD

42

2.080
1.896
0.778
1.123
4.044

4.141
3.549
2.649
1.532
12.945

2.328
2.042
0.767
1.381
4.510

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

EUR/GBP

EUR/JPY

EUR/USD

GBP/USD

USD/CAD

1.247
1.057
0.906
0.053
5.453

Whole sample (Jan 2007 - May 2012, 65 months)

1.593
2.445
1.904
1.791
1.984
1.518
2.192
1.785
1.583
1.838
0.712
1.267
0.748
0.829
0.864
0.640
0.685
0.730
0.734
0.891
4.280
7.952
4.233
4.593
5.462
Pre-crisis (Jan 2007-Jun 2008, 18 months)
0.889
1.132
1.795
1.258
1.275
1.679
0.906
0.979
1.546
1.217
1.149
1.674
0.339
0.432
0.789
0.396
0.397
0.521
0.459
0.640
0.685
0.730
0.734
0.997
1.804
2.028
3.397
1.829
2.005
3.182
Financial crisis (Jun 2008-Dec 2009, 18 months)
1.185
2.176
3.343
2.454
2.653
2.766
0.846
1.882
3.097
2.465
2.559
2.608
0.824
0.952
1.772
0.907
1.032
1.074
0.315
1.114
1.321
1.311
1.180
1.219
2.885
4.280
7.952
4.233
4.593
5.462
European sovereign debt crisis (Jan 2010-May 2012, 29 months)
1.507
1.518
2.291
1.965
1.576
1.688
1.518
1.527
2.243
1.891
1.451
1.666
1.113
0.368
0.756
0.466
0.363
0.547
0.053
0.739
1.244
1.240
1.028
0.891
5.453
2.483
5.617
3.519
2.552
3.115

EUR/CHF

2.061
1.917
0.679
1.213
4.238

2.344
2.453
0.756
1.204
4.450

1.535
1.348
0.618
0.661
2.737

1.994
1.871
0.742
0.661
4.450

USD/CHF

1.520
1.483
0.403
0.838
2.830

2.603
2.551
0.944
1.333
5.142

1.761
1.779
0.720
0.592
3.583

1.886
1.766
0.810
0.592
5.142

USD/JPY

liquidity measure over the whole period and over three subperiods: pre-crisis (Jan 2007 - Jun 2008), financial crisis (Jul 2008 - Dec 2009) and
European sovereign debt crisis (Jan 2010 - May 2012). The Volatility is computed as in Menkhoff, Sarno, Schmeling, and Schrimpf (2012), i.e.
monthly average of the daily absolute FX rate returns. The Volatility is measured in %, annualized. The sample covers 65 months, January 2007 May 2012.

Table 26: Volatility: descriptive statistics over Jan 2007 - May 2012. This table shows summary statistics for effective cost FX

2.762
2.261
1.742
1.123
12.945

Mean
Median
Std. dev.
Min
Max

AUD/USD

43

1.934
1.549
0.964
1.051
4.200

2.355
1.690
1.566
1.086
6.640

1.561
1.401
0.589
0.928
2.812

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

EUR/GBP

EUR/JPY

EUR/USD

GBP/USD

USD/CAD

1.139
0.782
0.945
0.603
5.436

Whole sample (Jan 2007 - May 2012, 65 months)

1.642
1.306
1.116
1.036
1.821
1.264
0.888
0.829
0.693
1.221
1.129
1.363
0.680
0.913
1.453
1.087
0.045
0.634
0.483
0.804
8.449
10.559
4.734
5.482
7.835
Pre-crisis (Jan 2007-Jun 2008, 18 months)
1.174
1.847
1.121
0.984
0.737
1.405
0.623
1.459
0.803
0.816
0.510
1.059
1.241
1.131
0.648
0.412
0.529
0.555
0.603
1.257
0.601
0.642
0.483
0.854
4.873
5.067
2.693
2.375
2.482
2.326
Financial crisis (Jun 2008-Dec 2009, 18 months)
0.919
1.765
1.586
1.202
1.185
2.014
0.661
1.183
0.765
0.857
0.927
1.794
0.569
1.722
2.305
1.008
0.887
1.319
0.617
1.087
0.594
0.634
0.530
0.804
2.627
8.449
10.559
4.734
4.236
4.789
European sovereign debt crisis (Jan 2010-May 2012, 29 months)
1.255
1.439
1.246
1.145
1.128
1.959
0.911
1.182
0.905
0.834
0.805
1.221
0.929
0.505
0.830
0.565
1.086
1.851
0.678
1.110
0.045
0.691
0.611
0.977
5.436
2.730
3.911
2.602
5.482
7.835

EUR/CHF

1.414
1.144
0.715
0.884
4.519

1.264
0.950
0.726
0.860
3.760

1.838
0.942
1.955
0.808
8.241

1.490
1.065
1.196
0.808
8.241

USD/CHF

0.028
0.025
0.014
0.003
0.058

0.290
0.028
0.731
0.001
2.978

1.295
1.138
0.736
0.067
3.492

0.451
0.037
0.758
0.001
3.492

USD/JPY

Effective Tick (EffTick) liquidity measure over the whole period and over three subperiods: pre-crisis (Jan 2007 - Jun 2008), financial crisis (Jul 2008
- Dec 2009) and European sovereign debt crisis (Jan 2010 - May 2012). The Effective Tick spread estimates are computed as in Holden (2009). The
Efftick is measured in bps. The sample covers 65 months, January 2007 - May 2012.

Table 27: Effective Tick measure: descriptive statistics over Jan 2007 - May 2012. This table shows summary statistics for

1.884
1.539
1.077
0.928
6.640

Mean
Median
Std. dev.
Min
Max

AUD/USD

44

1.003
0.990
0.240
0.707
1.337

1.795
1.491
0.890
0.953
3.722

0.772
0.751
0.169
0.566
1.165

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

EUR/GBP

EUR/JPY

EUR/USD

GBP/USD

USD/CAD

0.388
0.373
0.125
0.134
0.836

Whole sample (Jan 2007 - May 2012, 65 months)

0.760
0.460
0.292
0.693
1.074
0.693
0.446
0.281
0.576
1.008
0.260
0.132
0.053
0.381
0.406
0.453
0.263
0.213
0.337
0.632
1.596
0.853
0.458
1.879
2.326
Pre-crisis (Jan 2007-Jun 2008, 18 months)
0.320
0.586
0.325
0.280
0.495
1.017
0.304
0.578
0.330
0.280
0.472
1.062
0.051
0.093
0.049
0.006
0.129
0.245
0.262
0.462
0.263
0.269
0.337
0.709
0.433
0.718
0.403
0.292
0.691
1.387
Financial crisis (Jun 2008-Dec 2009, 18 months)
0.429
1.058
0.554
0.340
1.159
1.534
0.393
1.037
0.494
0.335
1.074
1.506
0.132
0.297
0.166
0.071
0.448
0.435
0.290
0.660
0.348
0.257
0.561
0.973
0.707
1.596
0.853
0.458
1.879
2.326
European sovereign debt crisis (Jan 2010-May 2012, 29 months)
0.405
0.683
0.486
0.271
0.528
0.825
0.409
0.692
0.476
0.268
0.531
0.767
0.138
0.115
0.058
0.036
0.088
0.154
0.134
0.453
0.416
0.213
0.360
0.632
0.836
1.088
0.617
0.345
0.733
1.128

EUR/CHF

0.489
0.477
0.069
0.389
0.716

0.527
0.519
0.110
0.393
0.719

0.392
0.368
0.058
0.334
0.505

0.473
0.461
0.094
0.334
0.719

USD/CHF

0.365
0.337
0.070
0.259
0.463

0.495
0.469
0.086
0.381
0.669

0.363
0.362
0.049
0.305
0.459

0.401
0.406
0.091
0.259
0.669

USD/JPY

measure over the whole period and over three subperiods: pre-crisis (Jan 2007 - Jun 2008), financial crisis (Jul 2008 - Dec 2009) and European
sovereign debt crisis (Jan 2010 - May 2012). The LOT percentage spread estimates are computed as in Lesmond, Ogden, and Trzcinka (1999). The
LOT is measured in %. The sample covers 65 months, January 2007 - May 2012.

Table 28: LOT measure: descriptive statistics over Jan 2007 - May 2012. This table shows summary statistics for LOT liquidity

1.119
0.953
0.652
0.566
3.722

Mean
Median
Std. dev.
Min
Max

AUD/USD

45

0.148
0.131
0.069
0.052
0.567
35.54%
SGD/USD
0.075
0.064
0.048
0.005
0.307
33.43%
JPY/EUR
0.175
0.169
0.069
0.041
0.473
34.75%
JPY/GBP
0.171
0.164
0.069
0.037
0.592
35.01%

0.097
0.082
0.056
0.012
0.344
37.45%
ZAR/USD
0.214
0.166
0.166
0.014
0.936
34.15%
NZD/EUR
0.208
0.190
0.090
0.062
0.660
31.61%
MYR/GBP
0.158
0.127
0.106
0.042
0.907
33.02%

CAD/USD
0.128
0.122
0.049
0.009
0.298
37.18%
KRW/USD
0.087
0.057
0.099
0.001
0.712
40.91%
NOK/EUR
0.171
0.156
0.075
0.063
0.451
18.14%
NZD/GBP
0.211
0.192
0.088
0.054
0.606
31.02%

DKK/USD
0.009
0.008
0.006
0.001
0.055
17.47%
SEK/USD
0.180
0.161
0.075
0.011
0.509
33.69%
SGD/EUR
0.154
0.138
0.063
0.048
0.475
30.02%
NOK/GBP
0.192
0.186
0.070
0.067
0.501
24.25%

HKD/USD
0.111
0.092
0.078
0.003
0.416
17.15%
CHF/USD
0.150
0.141
0.055
0.010
0.344
36.14%
CHF/EUR
0.128
0.118
0.057
0.046
0.449
20.26%
SGD/GBP
0.148
0.130
0.066
0.063
0.511
30.15%

INR/USD
0.139
0.131
0.052
0.006
0.411
35.10%
TWD/USD
0.071
0.065
0.047
0.000
0.258
25.61%
GBP/EUR
0.147
0.141
0.053
0.040
0.327
27.31%
ZAR/GBP
0.285
0.272
0.144
0.057
0.908
25.72%

JPY/USD
0.049
0.030
0.099
0.000
0.893
28.99%
GBP/USD
0.120
0.113
0.050
0.005
0.346
36.97%
AUD/GBP
0.186
0.167
0.079
0.079
0.699
31.78%
SEK/GBP
0.187
0.181
0.069
0.058
0.606
26.69%

MYR/USD
0.109
0.089
0.103
0.000
1.099
34.76%
AUD/EUR
0.189
0.169
0.084
0.063
0.671
31.65%
CAD/GBP
0.149
0.134
0.057
0.060
0.443
34.40%
CHF/GBP
0.151
0.142
0.053
0.052
0.370
30.53%

MXN/USD
0.148
0.141
0.074
0.035
0.524
36.46%
CAD/EUR
0.158
0.149
0.053
0.058
0.385
34.69%
DKK/GBP
0.141
0.131
0.056
0.046
0.410
28.76%
TRY/GBP
0.300
0.241
0.255
0.054
2.469
27.97%

NZD/USD

0.174
0.165
0.071
0.015
0.473
33.43%
HKD/EUR
0.135
0.129
0.046
0.044
0.300
35.66%
HKD/GBP
0.123
0.114
0.048
0.036
0.340
35.84%
EUR/USD
0.139
0.133
0.046
0.042
0.297
35.80%

NOK/USD

Schultz (CS) liquidity measure over Jan 1991 - May 2012. The CS percentage spread estimates are computed as in Corwin and Schultz (2012). % zero
denotes the mean monthly proportion of zero 2-day CS estimates. The CS is measured in %. The sample covers 257 months, Jan 1991 - May 2012.

Table 29: CS measure: descriptive statistics over Jan 1991 - May 2012. This table shows summary statistics for monthly Corwin-

Mean
Median
Std. dev.
Min
Max
% zero

Mean
Median
Std. dev.
Min
Max
% zero

Mean
Median
Std. dev.
Min
Max
% zero

Mean
Median
Std. dev.
Min
Max
% zero

AUD/USD

46

0.257
0.221
0.174
0.048
1.807
SGD/USD
0.116
0.096
0.082
0.027
0.591
JPY/EUR
0.258
0.231
0.144
0.077
1.144
JPY/GBP
0.264
0.225
0.150
0.077
0.935

0.159
0.127
0.104
0.030
0.668
ZAR/USD
0.296
0.232
0.254
0.023
2.291
NZD/EUR
0.282
0.235
0.260
0.075
3.852
MYR/GBP
0.251
0.199
0.201
0.065
2.230

CAD/USD
0.234
0.213
0.107
0.083
0.653
KRW/USD
0.187
0.120
0.319
0.016
4.322
NOK/EUR
0.158
0.125
0.130
0.034
1.169
NZD/GBP
0.276
0.251
0.169
0.083
2.109

DKK/USD
0.010
0.006
0.018
0.000
0.248
SEK/USD
0.266
0.235
0.127
0.089
0.934
SGD/EUR
0.209
0.188
0.098
0.056
0.787
NOK/GBP
0.213
0.188
0.106
0.048
0.750

HKD/USD
0.109
0.082
0.123
0.002
1.110
CHF/USD
0.262
0.234
0.123
0.082
1.050
CHF/EUR
0.123
0.098
0.096
0.007
0.756
SGD/GBP
0.205
0.179
0.106
0.061
0.830

INR/USD
0.239
0.212
0.117
0.071
0.793
TWD/USD
0.091
0.070
0.079
0.000
0.703
GBP/EUR
0.172
0.158
0.084
0.027
0.572
ZAR/GBP
0.318
0.267
0.199
0.078
1.634

JPY/USD
0.096
0.051
0.160
0.000
1.506
GBP/USD
0.208
0.186
0.099
0.066
0.620
AUD/GBP
0.271
0.244
0.153
0.088
1.569
SEK/GBP
0.223
0.197
0.114
0.046
0.766

MYR/USD
0.225
0.153
0.276
0.000
2.001
AUD/EUR
0.266
0.231
0.168
0.080
1.892
CAD/GBP
0.228
0.206
0.099
0.076
0.529
CHF/GBP
0.205
0.180
0.107
0.066
0.730

MXN/USD
0.254
0.216
0.160
0.045
1.143
CAD/EUR
0.236
0.207
0.103
0.083
0.726
DKK/GBP
0.184
0.160
0.100
0.044
0.786
TRY/GBP
0.371
0.244
0.463
0.068
4.379

NZD/USD

0.257
0.234
0.121
0.063
0.804
HKD/EUR
0.231
0.201
0.106
0.065
0.696
HKD/GBP
0.209
0.185
0.102
0.065
0.621
EUR/USD
0.237
0.213
0.104
0.079
0.694

NOK/USD

Gibbs liquidity measure over over Jan 1991 - May 2012. The Gibbs spread estimates are computed as in Hasbrouck (2009). The Gibbs is measured in
%. The sample covers 257 months, Jan 1991 - May 2012.

Table 30: Gibbs measure: descriptive statistics over Jan 1991 - May 2012. This table shows summary statistics for the monthly

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

AUD/USD

47

1.880
1.662
1.074
0.548
12.382
SGD/USD
0.832
0.720
0.493
0.187
3.830
JPY/EUR
1.973
1.777
0.897
0.599
7.606
JPY/GBP
2.010
1.802
0.928
0.667
8.564

1.220
1.026
0.697
0.248
5.628
ZAR/USD
2.174
2.001
1.501
0.254
11.868
NZD/EUR
1.994
1.898
0.682
0.939
5.813
MYR/GBP
1.763
1.494
1.018
0.563
9.258

CAD/USD
1.752
1.666
0.589
0.762
4.343
KRW/USD
1.325
0.946
1.908
0.114
23.362
NOK/EUR
1.046
0.941
0.561
0.197
3.345
NZD/GBP
1.971
1.880
0.685
0.611
5.361

DKK/USD
0.062
0.046
0.054
0.000
0.259
SEK/USD
2.036
1.849
0.797
0.832
5.769
SGD/EUR
1.547
1.422
0.576
0.610
4.462
NOK/GBP
1.577
1.484
0.652
0.623
4.910

HKD/USD
0.727
0.556
0.671
0.016
4.448
CHF/USD
1.911
1.810
0.585
0.661
4.475
CHF/EUR
0.893
0.741
0.575
0.052
5.453
SGD/GBP
1.484
1.355
0.593
0.550
4.224

INR/USD
1.775
1.682
0.655
0.592
4.918
TWD/USD
0.574
0.481
0.385
0.000
2.888
GBP/EUR
1.292
1.216
0.541
0.263
4.066
ZAR/GBP
2.342
2.083
1.197
0.480
9.676

JPY/USD
0.683
0.392
1.093
0.000
8.926
GBP/USD
1.551
1.429
0.625
0.650
4.413
AUD/GBP
1.991
1.846
0.843
0.859
9.344
SEK/GBP
1.660
1.548
0.678
0.447
5.182

MYR/USD
1.507
1.178
1.580
0.030
14.042
AUD/EUR
1.977
1.817
0.880
0.798
10.192
CAD/GBP
1.720
1.680
0.551
0.804
4.347
CHF/GBP
1.531
1.407
0.686
0.506
5.425

MXN/USD
1.876
1.772
0.981
0.412
8.164
CAD/EUR
1.812
1.679
0.559
0.788
5.176
DKK/GBP
1.372
1.272
0.582
0.430
4.144
TRY/GBP
2.488
1.954
1.940
0.712
20.909

NZD/USD

1.949
1.844
0.726
0.665
6.324
HKD/EUR
1.719
1.601
0.597
0.708
4.907
HKD/GBP
1.546
1.413
0.625
0.648
4.404
EUR/USD
1.778
1.668
0.584
0.730
4.049

NOK/USD

over over Jan 1991 - May 2012. The monthly volatility estimates are computed as in Menkhoff, Sarno, Schmeling, and Schrimpf (2012) and reported
in %, annualized. The sample covers 257 months, Jan 1991 - May 2012.

Table 31: Volatility: descriptive statistics over Jan 1991 - May 2012. This table shows summary statistics for the monthly volatility

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

Mean
Median
Std. dev.
Min
Max

AUD/USD

(1)
FX pair
AUD/USD
CAD/USD
DKK/USD
HKD/USD
INR/USD
JPY/USD
MYR/USD
MXN/USD
NZD/USD
NOK/USD
SGD/USD
ZAR/USD
KRW/USD
SEK/USD
CHF/USD
TWD/USD
GBP/USD
AUD/EUR
CAD/EUR
HKD/EUR
JPY/EUR
NZD/EUR
NOK/EUR
SGD/EUR
CHF/EUR
GBP/EUR
AUD/GBP
CAD/GBP
DKK/GBP
HKD/GBP
JPY/GBP
MYR/GBP
NZD/GBP
NOK/GBP
SGD/GBP
ZAR/GBP
SEK/GBP
CHF/GBP
TRY/GBP
EUR/USD

Type
floating
floating
pegged2
pegged1
floating
floating
pegged1
floating
floating
floating
floating
floating
floating
floating
floating
floating
floating
floating
floating
pegged2
floating
floating
floating
floating
floating
floating
floating
floating
pegged2
pegged2
floating
pegged2
floating
floating
floating
floating
floating
floating
pegged2
floating

Country
Australia
Canada
Denmark
Hong Kong
India
Japan
Malaysia
Mexico
New Zealand
Norway
Singapore
South Africa
South Korea
Sweden
Switzerland
Taiwan
UK
Australia
Canada
Hong Kong
Japan
New Zealand
Norway
Singapore
Switzerland
UK
Australia
Canada
Denmark
Hong Kong
Japan
Malaysia
New Zealand
Norway
Singapore
South Africa
Sweden
Switzerland
Turkey
Eurozone

Type
developed
developed
developed
emerging
emerging
developed
emerging
emerging
developed
developed
emerging
emerging
emerging
developed
developed
emerging
developed
developed
developed
emerging
developed
developed
developed
emerging
developed
developed
developed
developed
developed
emerging
developed
emerging
developed
developed
emerging
emerging
developed
developed
emerging
developed

beta
0.553
0.475
0.798
0.148
0.132
0.630
0.139
0.315
0.607
0.689
0.443
0.382
0.169
0.709
0.736
0.280
0.721
0.690
0.721
0.806
0.668
0.704
0.464
0.710
0.610
0.687
0.670
0.614
0.686
0.728
0.676
0.465
0.717
0.643
0.631
0.439
0.564
0.676
0.290
0.819

t-stat
[4.323]
[5.314]
[13.675]
[2.476]
[1.423]
[7.437]
[2.570]
[3.149]
[7.708]
[11.641]
[6.726]
[3.286]
[2.327]
[11.770]
[7.776]
[4.036]
[11.291]
[6.925]
[9.871]
[13.067]
[9.400]
[7.238]
[8.493]
[10.908]
[6.933]
[9.790]
[6.474]
[8.716]
[9.461]
[11.871]
[9.851]
[8.811]
[8.385]
[14.847]
[10.242]
[4.935]
[9.466]
[9.405]
[4.535]
[14.643]

(2)
R2
0.306
0.226
0.636
0.022
0.017
0.397
0.019
0.099
0.368
0.475
0.196
0.146
0.028
0.503
0.541
0.078
0.520
0.476
0.519
0.650
0.446
0.495
0.215
0.504
0.372
0.472
0.449
0.377
0.471
0.530
0.458
0.216
0.515
0.413
0.398
0.193
0.318
0.456
0.084
0.670

beta
0.515
0.451
0.776
0.140
0.118
0.600
0.128
0.293
0.579
0.663
0.417
0.360
0.149
0.683
0.711
0.260
0.695
0.661
0.694
0.785
0.636
0.682
0.436
0.686
0.585
0.663
0.640
0.584
0.658
0.702
0.646
0.437
0.695
0.613
0.601
0.412
0.534
0.646
0.278
0.798

t-stat
[4.108]
[5.062]
[12.554]
[2.427]
[1.271]
[7.008]
[2.506]
[2.987]
[7.271]
[10.860]
[6.586]
[3.148]
[1.966]
[10.852]
[7.194]
[3.866]
[10.454]
[6.812]
[9.092]
[12.032]
[8.835]
[7.050]
[7.479]
[10.392]
[6.749]
[9.199]
[6.296]
[8.076]
[9.062]
[11.032]
[9.176]
[8.429]
[8.167]
[13.210]
[9.775]
[4.682]
[8.587]
[8.934]
[4.234]
[13.533]

R2
0.265
0.203
0.602
0.020
0.014
0.360
0.016
0.086
0.336
0.440
0.174
0.129
0.022
0.466
0.506
0.067
0.483
0.436
0.482
0.616
0.405
0.465
0.190
0.471
0.342
0.440
0.409
0.341
0.433
0.493
0.417
0.191
0.483
0.376
0.362
0.170
0.285
0.417
0.077
0.637

Table 32: Commonality regressions for each currency pair. The table shows the regressions output
from regressing (changes in) individual FX rate liquidities on the (changes in) systematic LF liquidity.
Specification (1) refers to regressing each FX rate liquidity on the common systematic FX liquidity, obtained
from the PCA across the 40 exchange rates as well as the three best LF liquidity proxies. Specification (2)
refers to regressing each FX rate liquidity on the systematic FX liquidity, obtained from the PCA across
39 exchange rates (excluding the regressed FX rate) and the three best LF liquidity proxies. The individual
FX rate liquidities are obtained from the PCA across the three best LF liquidity proxies for each currency
pair. Pegged1 denotes the pegged currency pair. Pegged2 denotes the currency pair, where one currency in
a pair is pegged to the currency outside the pair. HKD is pegged to the USD over the whole sample; MYR
is pegged to the USD over Sep 1998 - Jul 2005; DKK is pegged to the EUR from Jan 1999 till the end of
the sample; TRY is pegged to the USD over the whole sample. The t-statistics are reported in brackets.
Bold numbers are statistically at the 5% level. The R-squred are equal to the squared betas (all variables are
standardized to have zero mean and unit variance). The sample is January 1991 May 2012.

48

Currency pair

Type

Country

Type

AUD/USD
CAD/USD
DKK/USD
HKD/USD
INR/USD
JPY/USD
MYR/USD
MXN/USD
NZD/USD
NOK/USD
SGD/USD
ZAR/USD
KRW/USD
SEK/USD
CHF/USD
TWD/USD
GBP/USD
AUD/EUR
CAD/EUR
HKD/EUR
JPY/EUR
NZD/EUR
NOK/EUR
SGD/EUR
CHF/EUR
GBP/EUR
AUD/GBP
CAD/GBP
DKK/GBP
HKD/GBP
JPY/GBP
MYR/GBP
NZD/GBP
NOK/GBP
SGD/GBP
ZAR/GBP
SEK/GBP
CHF/GBP
TRY/GBP
EUR/USD

floating
floating
pegged2
pegged1
floating
floating
pegged1
floating
floating
floating
floating
floating
floating
floating
floating
floating
floating
floating
floating
pegged2
floating
floating
floating
floating
floating
floating
floating
floating
pegged2
pegged2
floating
pegged2
floating
floating
floating
floating
floating
floating
pegged2
floating

Australia
Canada
Denmark
Hong Kong
India
Japan
Malaysia
Mexico
New Zealand
Norway
Singapore
South Africa
South Korea
Sweden
Switzerland
Taiwan
UK
Australia
Canada
Hong Kong
Japan
New Zealand
Norway
Singapore
Switzerland
UK
Australia
Canada
Denmark
Hong Kong
Japan
Malaysia
New Zealand
Norway
Singapore
South Africa
Sweden
Switzerland
Turkey
Eurozone

developed
developed
developed
emerging
emerging
developed
emerging
emerging
developed
developed
emerging
emerging
emerging
developed
developed
emerging
developed
developed
developed
emerging
developed
developed
developed
emerging
developed
developed
developed
developed
developed
emerging
developed
emerging
developed
developed
emerging
emerging
developed
developed
emerging
developed

lag
0.16
0.09
-0.11
0.02
0.09
0.02
0.03
0.07
0.12
-0.04
0.06
0.17
0.21
-0.06
-0.09
-0.05
-0.06
0.07
-0.06
-0.09
0.07
-0.02
0.00
-0.14
0.08
-0.08
0.09
0.01
-0.07
-0.06
0.03
0.06
0.02
-0.12
-0.06
0.11
-0.03
0.00
-0.03
-0.09

cont.
[2.26]
[1.95]
[-2.89]
[0.42]
[1.57]
[0.40]
[0.69]
[0.77]
[2.30]
[-0.85]
[1.17]
[2.46]
[2.65]
[-1.42]
[-2.03]
[-0.88]
[-1.24]
[0.94]
[-1.37]
[-2.83]
[1.64]
[-0.42]
[-0.01]
[-3.03]
[1.90]
[-1.18]
[1.29]
[0.30]
[-1.09]
[-1.45]
[0.50]
[0.63]
[0.37]
[-2.68]
[-1.13]
[1.84]
[-0.45]
[0.03]
[-0.52]
[-2.20]

0.65
0.55
0.75
0.14
0.17
0.64
0.16
0.33
0.65
0.67
0.48
0.45
0.24
0.69
0.66
0.28
0.69
0.70
0.67
0.76
0.71
0.66
0.46
0.66
0.62
0.67
0.71
0.62
0.68
0.70
0.69
0.48
0.71
0.63
0.62
0.48
0.59
0.66
0.27
0.78

lead
[5.03]
[6.63]
[13.11]
[2.33]
[2.02]
[7.47]
[2.15]
[2.73]
[9.07]
[11.35]
[6.56]
[3.58]
[3.06]
[12.41]
[6.83]
[3.63]
[12.13]
[5.56]
[9.88]
[12.75]
[10.06]
[7.81]
[7.82]
[10.46]
[7.24]
[8.97]
[6.03]
[9.21]
[8.27]
[12.31]
[10.00]
[6.71]
[9.61]
[13.60]
[9.81]
[5.11]
[8.69]
[9.06]
[4.55]
[13.13]

0.17
0.16
-0.06
-0.04
0.04
0.02
0.04
-0.02
0.03
-0.02
0.07
0.06
0.04
-0.01
-0.17
0.07
-0.04
-0.03
-0.10
-0.07
0.08
-0.13
-0.02
-0.03
-0.05
0.01
0.05
0.03
0.05
-0.04
0.04
0.01
-0.06
0.07
0.04
0.04
0.12
-0.07
-0.05
-0.04

R2
[1.95]
[2.06]
[-1.15]
[-0.70]
[0.44]
[0.22]
[0.47]
[-0.23]
[0.56]
[-0.46]
[1.07]
[0.64]
[0.56]
[-0.27]
[-2.57]
[0.84]
[-0.70]
[-0.28]
[-1.83]
[-1.46]
[1.25]
[-2.49]
[-0.41]
[-0.56]
[-0.84]
[0.21]
[0.57]
[0.56]
[0.78]
[-0.71]
[0.74]
[0.12]
[-1.21]
[1.45]
[0.55]
[0.44]
[1.68]
[-1.21]
[-0.79]
[-0.90]

0.352
0.252
0.648
0.024
0.027
0.393
0.022
0.105
0.385
0.478
0.202
0.172
0.070
0.508
0.570
0.086
0.522
0.479
0.529
0.663
0.450
0.508
0.216
0.518
0.379
0.474
0.456
0.375
0.473
0.533
0.456
0.217
0.518
0.432
0.399
0.203
0.330
0.461
0.087
0.675

Table 33: Commonality regressions for each currency pair: adding leading and lagged systematic
FX liquidity. The table shows the regressions output from regressing (changes in) individual FX rate
liquidities on the (changes in) lagged, contemporaneous and leading systematic LF liquidity. The systematic
FX liquidity is obtained from the PCA across the 40 exchange rates as well as the three best LF liquidity
proxies. The individual FX rate liquidities are obtained from the PCA across the three best LF liquidity
proxies (CS, Gibbs and Volatility) for each currency pair. "Pegged1" denotes the pegged currency pair.
"Pegged2" denotes the currency pair, where one currency in a pair is pegged to the currency outside the
pair. HKD is pegged to the USD over the whole sample; MYR is pegged to the USD over Sep 1998 - Jul
2005; DKK is pegged to the EUR from Jan 1999 till the end of the sample; TRY is pegged to the USD over
the whole sample. The t-statistics based on the standerd errors, robust to conditional heteroscedasticity and
serial correlation up to one lag as in Newey and West (1987) are reported in brackets. Bold numbers are
statistically at the 5% level. The R-squred are equal to the squared betas (all variables are standardized to
have zero mean and unit variance). The sample is January 1991 May 2012.

49

Variable

Period

Description

Source

FX return
Mean IMF return

Jan 1995May 2012

AER factor

Jan 1991May 2012

Mean USD return

Feb 1991May 2012

USD effective rate

Jan 1991May 2012

Mean IMF exchange rate returns across 40 countries in our sample. IMF exchange rate returns are monthly returns in the value
of each currency wrt to the SDR (Special Drawing Right), a
basket of major currencies created by the IMF.
AER (dollar) factor from Lustig, Roussanov, and Verdelhan
(2011) - mean excess return on six portfolios, sorted each month
by their forward discounts.
Mean USD exchange rate returns across all countries in our
sample. Exchange rate returns are monthly returns in the value
of each countrys currency wrt to the US dollar.
The USD effective exchange rate represents the market tradeweighted value of the USD against the other currencies.

Own calculations based

on data from IMF,
Datastream
Hanno Lustigs
sonal website

per-

Own calculations based

on data from Datastream
Datastream

FX risk
HML

Jan 1991May 2012

3H-3L

Jan 1991May 2012

JP FX imlp vol

Apr 1992May 2012

Interest rates return

Fin comm paper

Jan 1997May 2012

Fedfunds rate

Jan 1991May 2012

HML factor from Lustig, Roussanov, and Verdelhan (2011) returns on the portfolio, long in the currencies with the highest
forward discounts and short in the currencies with the lowest
forward discounts.
Difference between three highest and three lowest 3-month interbank interest rates (using interest rates on 3-month treasuries
when interbank is not available)
The JP Morgan Global FX volaility index tracks implied volatility of three-month at-the-money forward options on major and
developed currencies.
Overnight AA Financial Commercial Paper Interest Rate
The effective federal funds rate is a weighted average of rates
on brokered trades.

Hanno Lustigs
sonal website

per-

Datastream

Bloomberg

Federal Reserve
Federal Reserve

Interest rates risk

TED spread

Jan 1991May 2012

LIBOR-OIS

Dec 2001May 2012

MOVE index

Jan 1991May 2012

TED spread represents the difference in the interest rates between the three-month U.S. Treasury bill and the three-month
USD LIBOR.
The LIBOR-OIS spread is the difference between LIBOR and
the overnight indexed swap rates.
The Merrill Lynch MOVE Index reports the average implied
volatility across a range of outstanding options on the two-year,
five-year, 10-year, and 30-year U.S. Treasury securities.

Bloomberg
Bloomberg
Bloomberg

Corporate bonds return

i_AAA

Jan 1991May 2012

i_BAA

Jan 1991May 2012

Moodys long-term AAA corporate bond yields are derived

from pricing data on a regularly replenished population of
AAA-rated corporate bonds in the U.S. market, each with current outstandings over $100 million.
Moodys long-term BAA corporate bond yields are derived
from pricing data on a regularly replenished population of
BAA-rated corporate bonds in the U.S. market, each with current outstandings over $100 million.

Bloomberg

Bloomberg

Corporate bonds risk

Jan 1991May 2012

Percentage difference between Moodys corporate bond index

BAA and AAA yields.

Bloomberg

Jan 1991May 2012

MSCI World Index captures large and mid cap representation

across 24 Developed Markets countries.

Bloomberg

VIX Index

Jan 1991May 2012

Chicago Board Options Exchange Market Volatility Index

(VIX) index measures implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the markets expectation of stock market
volatility over the next 30 day period.

Bloomberg

MSCI volatility

Jan 1991May 2012

Volatility (based on the daily data) on the MSCI World index

Own
calculations
based on the data from
Bloomberg

US def spread
Stocks return
MSCI return
Stocks risk

Description of the dataset of50 monthly return and risk factors on the
FX/money/bond/stock markets.

Table 34:

51
0.180
209

-0.424
[-3.838]

0.025
255

0.159
[1.601]

(2)

0.043
255

-0.207
[-2.072]

(3)

0.000
255

0.011
[0.210]

(4)

0.076
255

0.276
[3.629]

(5)

0.014
255

-0.118
[-1.428]

(6)

0.301
241

-0.548
[-8.399]

(7)

0.005
184

-0.072
[-0.828]

(8)

0.015
255

0.123
[1.225]

(9)

0.056
255

-0.237
[-3.861]

(10)

0.187
125

-0.433
[-7.607]

(11)

-0.231
[-3.073]
0.053
255

(12)

Table 35: Explaining FX systematic liquidity with each individual FX and money market factor. Single regressions of the
(changes in) FX systematic liquidity on (changes in) each FX and money market return and risk variable. The t-statistics are
reported in brackets. Bold numbers are statistically significant at the 5% level. Bold and italic R2 denote the highest R2 in
the risk or return subgroup. The maximum sample is January 1991 - May 2012.

R2
N

4 MOVE index

4 LIBOR-OIS

Interest rates risk

4 TED spread

4 Fed funds rate

Interest rates return

4 Fin comm paper

4 JP FX imlp vol

4 3H-3L

FX risk
4 HML

USD effective rate

Mean USD return

AER factor

FX return
Mean IMF return

(1)

52
0.073
255

0.270
[2.665]

(5)

-0.533
[-6.787]
0.284
255

(6)

Table 36: Explaining FX systematic liquidity with each individual corporate and stocks factor. Single regressions of the (changes
in) FX systematic liquidity on (changes in) each corporate bonds and stocks return and risk variable. The t-statistics are
reported in brackets. Bold numbers are statistically significant at the 5% level. Bold numbers are statistically significant at
the 5% level. Bold and italic R2 denote the highest R2 in the risk or return subgroup. The sample is January 1991 May
2012.

0.226
255

0.036
255

-0.189
[-1.565]

(4)

4 MSCI volatility
R2
N
0.019
255

-0.137
[-1.066]

(3)

-0.476
[-6.729]

0.001
255

-0.037
[-0.369]

(2)

4 VIX

Stocks risk

Stocks return
MSCI return

Corporate bonds risk

4 US default spread

4iBAA bonds

Corporate bonds return

4iAAA bonds

(1)

53

4 Fedfunds rate

4TED

4iBAA

4 US def spread

MSCI return

4 MSCI volatility

FX risk

Int rates return

Int rates risk

Corp bonds return

Corp bonds risk

Stocks return

Stocks risk

0.099
[1.565]
-0.104
[-2.343]
0.071
[1.252]
-0.185
[-2.913]
0.051
[0.825]
-0.403
[-5.996]
-0.308
[-4.238]
0.360

(1)

-0.312
[-4.231]
0.287

(2)
-0.114
[-1.576]
-0.409
[-3.387]

40 currencies
(3)
-0.039
[-0.686]
-0.226
[-1.955]
0.081
[1.288]
-0.088
[-2.300]
0.061
[1.158]
-0.141
[-2.295]
-0.010
[-0.159]
-0.325
[-4.314]
-0.307
[-4.325]
0.397
-0.866
[-4.691]
0.276

(5)
-0.324
[-1.463]
-1.335
[-3.256]

(6)
-0.074
[-0.416]
-0.739
[-1.955]
0.187
[1.055]
-0.172
[-1.379]
0.123
[0.663]
-0.256
[-1.163]
-0.049
[-0.215]
-1.230
[-5.268]
-0.781
[-4.583]
0.401

18 currencies/USD

0.245
[1.344]
-0.225
[-1.558]
0.160
[0.818]
-0.398
[-1.722]
0.123
[0.595]
-1.484
[-6.653]
-0.786
[-4.421]
0.362

(4)

-1.052
[-3.955]
0.259

(8)
-0.341
[-1.556]
-1.111
[-3.635]

(9)
-0.126
[-0.677]
-0.578
[-1.898]
0.276
[1.391]
-0.225
[-1.837]
0.187
[1.239]
-0.373
[-2.168]
-0.037
[-0.189]
-0.975
[-3.614]
-1.026
[-3.787]
0.356

9 currencies/EUR

0.321
[1.633]
-0.266
[-2.005]
0.209
[1.321]
-0.486
[-2.877]
0.135
[0.708]
-1.175
[-5.034]
-1.029
[-3.734]
0.331

(7)

-0.849
[-3.505]
0.241

(11)
-0.385
[-1.663]
-1.205
[-3.181]

(12)
-0.185
[-0.993]
-0.696
[-1.867]
0.265
[1.288]
-0.380
[-2.657]
0.217
[1.211]
-0.604
[-3.002]
-0.033
[-0.167]
-0.727
[-3.124]
-0.904
[-3.879]
0.332

13 currencies/GBP

0.320
[1.554]
-0.430
[-2.640]
0.242
[1.246]
-0.741
[-3.548]
0.193
[1.022]
-0.968
[-4.669]
-0.908
[-3.830]
0.295

(10)

Table 37: Explaining FX systematic liquidity: using all FX rates, FX rates against USD, EUR, and GBP. Systematic FX liquidity
(based on the PCA for all 40 currencies, or 18 currencies against USD, or 8 currencies against EUR, or 13 currencies
against GBP) is regressed on (a) non-FX contemporaneous risk and return variables, and lagged systematic FX liquidity
specifications (1), (4), (7) and (10), correspondingly; (b) FX contemporaneous risk and return variables, and lagged systematic
FX liquidityspecifications (2), (5), (8) and (11); (c) all contemporaneous risk and return variables, and lagged systematic
FX liquidityspecifications (3), (6), (9) and (12). All variables except for mean USD return and MSCI stock return are in
changes. Lagged systematic FX liquidity 4LM;t 1 is based on the PCA for all 40 currencies. The t-statistics based on the
standard errors, robust to conditional heteroscedasticity and serial correlation up to one lag as in Newey and West (1987), are
reported in brackets. Bold numbers are statistically significant at the 5% level. The sample is January 1991 May 2012, 257
months.

R2

4 JP FX impl vol

FX return

4LM;t

Best factor
Mean USD return

4LM is based on...

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