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Title:Global liquidity and exchange rates PDF Logo
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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