Does liquidity in the FX market depend on volatility?

We re-examine the relationship between exchange rates and order flow as proposed by Evans and Lyons (2002). Compared to their linear specification, we find that the response of exchange rates to order flow may depend on market historical volatility. If market historical volatility is high, a given order seems to have a lower price impact than in calmer periods. Overall, our simple threshold mechanism has the power to produce higher correlation coefficients.

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Year of publication:	2004
Authors:	Westerhoff, Frank ; Manzan, Sebastiano
Published in:	Economics Bulletin. - AccessEcon, ISSN 1545-2921. - Vol. 6.2004, 10, p. 1-8
Publisher:	AccessEcon
Subject:	exchange rate dynamics

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Extent:	application/pdf
Type of publication:	Article
Language:	English
Classification:	F3 - International Finance ; G1 - General Financial Markets
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005094677