Understanding foreign exchange markets is key to understanding the global financial system. Yet, a clear understanding of why and how foreign exchange illiquidity materialises is still missing. This column suggests that foreign exchange liquidity can be impaired in times of flight to quality and higher global risk, and that commonality increases in distressed markets.
Nina Karnaukh, Angelo Ranaldo, Paul Söderlind, Thursday, September 10, 2015
Gino Cenedese, Richard Payne, Lucio Sarno, Giorgio Valente, Friday, July 17, 2015
Various theories suggest that exchange rate fluctuations and stock returns are linked. In this column, the authors find little evidence of a relationship between the two. Thus, a simple trading strategy that invests in countries with the highest expected equity returns and shorts those with the lowest generates substantial risk-adjusted returns.
Jeffrey Frankel, Friday, December 6, 2013
Except for the period 1992-2000, the dollar’s role as an international currency has been slowly declining since 1976. Since 2010, there has been another pause in this decline – somewhat surprising, given that the financial crisis began in the US, and given Congress’ recent flirtations with default. The dollar’s resilience as the world’s reserve currency is due to a lack of good alternatives – the euro has its own problems, and the yuan only accounts for 2.2% of forex transactions.
Christian Daude, Monday, December 10, 2012
Latin American central banks are facing new challenges in the form of unprecedented levels of uncertainty and exchange rate appreciation pressures. This column, focusing on Brazil, Chile, Colombia, Peru and Mexico, argues that there is an overestimation of the potential output in several Latin American economies, a lack of an explicit policy direction from central banks, and lacklustre frameworks for macroprudential policy. Although inflation targeting has served countries in Latin America well, significant risks remain.
Loriano Mancini, Angelo Ranaldo, Jan Wrampelmeyer, Monday, September 3, 2012
The foreign exchange market facilitates international trade and investment and is central to the global financial system. Market participants, both public and private, commonly think of the foreign exchange market as highly liquid at all times. This column challenges this view by documenting significant declines in liquidity during the recent financial crisis.
Maurizio Michael Habib, Livio Stracca, Sunday, January 30, 2011
What makes a safe-haven currency? This column analyses a panel of 52 currencies in advanced and emerging countries over the past 25 years. It finds that safe-haven status is not determined by the interest rate spread, as emphasised in the carry trade literature, but by the net foreign asset position, which is an indicator of country risk and external vulnerability.
Pasquale Della Corte, Lucio Sarno, Ilias Tsiakas, Wednesday, January 26, 2011
The carry trade in foreign currency has attracted considerable attention from academics and practitioners. This column presents evidence of a new carry trade strategy – this time speculating on the volatility of foreign exchange. This is done by buying or selling forward volatility agreements. It suggests that investors following the new carry trade can do extremely well – regardless of whether the value of these currencies go up or down.
Dagfinn Rime, Michael R King, Thursday, December 23, 2010
Daily average foreign exchange market turnover reached $4 trillion in April 2010, 20% higher than in 2007. This column describes how recent growth is largely due to the increased trading activity of “other financial institutions”, which include high-frequency traders, banks trading as clients of the biggest dealers, and online trading by retail investors.
Michael Melvin, Mark P. Taylor, Friday, November 6, 2009
The timing of the subprime crisis that became the global crisis is well known. Its impact on the foreign exchange markets has been much less discussed. This column fills that void. Its findings suggest that foreign exchange portfolio managers could have protected their portfolio by an appropriate risk control strategy using market stress indicators.
Anton Brender, Emile Gagna, Florence Pisani, Tuesday, July 21, 2009
The crisis has broken the close correlation between differences in expected interest rates and the euro-dollar exchange rate. This column attributes that to the sharp increase in risk aversion triggered by the collapse of Lehman Brothers. It argues that fluctuations in risk aversion explain the path followed by the euro-dollar exchange rate since the beginning of the financial crisis.
Richard M. Levich, Friday, July 10, 2009
How can markets prevent counterparty failure from cascading into broad financial turmoil? This column looks at the seven-year-old clearing and settlement bank that handles 60% of foreign exchange transactions. The institution’s effective mitigation of counterparty risk throughout the financial crisis may be a model for a centralised derivatives trading exchange.
Jorge A. Chan-Lau, Marco A. Espinosa-Vega, Kay Giesecke, Juan Solé, Saturday, May 2, 2009
The current financial crisis has underscored the problem of institutions that are too connected to be allowed to fail. This column suggests new methodologies that could form the basis for policies and regulation to address the too-connected-to-fail problem.