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http://hdl.handle.net/10419/60847
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| Title: | | Global liquidity and exchange rates  |
| Authors: | | Adrian, Tobias Etula, Erkko Shin, Hyun Song |
| Issue Date: | | 2009 |
| Series/Report no.: | | Staff Report, Federal Reserve Bank of New York 361 |
| Abstract: | | We present evidence that the funding liquidity aggregates of U.S. financial intermediaries forecast exchange rate growth-at weekly, monthly, and quarterly horizons, both in-sample and out-of-sample, and for a large set of currencies. We estimate prices of risk using a cross-sectional asset pricing approach and show that U.S. dollar funding liquidity forecasts exchange rates because of its association with time-varying risk premia. We provide a theoretical foundation for a funding liquidity channel in an intertemporal equilibrium pricing model where the 'risk appetite' of dollar-funded intermediaries fluctuates with the tightness of their balance sheet constraints. Our empirical evidence shows that this channel is separate from the more familiar 'carry trade' channel. |
| Subjects: | | Asset pricing financial intermediaries exchange rates |
| JEL: | | F30 F31 G12 G24 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Staff Reports, Federal Reserve Bank of New York
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