Time-Varying Liquidity in Foreign Exchange

Abstract

This paper addresses whether currency trades have greater price impact when public information is flowing rapidly. We develop an optimizing model to account for why public news should increase the price impact of trades. Using transaction data made available by electronic trading, we test whether trades following macroeconomic news have higher price impact. They do: price impact per dollar traded is about 10 percent higher per news announcement in the previous hour. After controlling for public information flow, we do not find evidence that liquidity depends on trading volume and return volatility. The findings provide policy makers with guidance for the timing and magnitude intervention.

Keywords: Foreign Exchange

JEL Classification: F31