Template-Type: ReDIF-Paper 1.0
Author-Name: Wenqian Huang
Author-X-Name-First: Wenqian
Author-X-Name-Last: Huang
Author-Name: Angelo Ranaldo
Author-X-Name-First: Angelo
Author-X-Name-Last: Ranaldo
Author-Name: Andreas Schrimpf
Author-X-Name-First: Andreas
Author-X-Name-Last: Schrimpf
Author-Name: Fabricius Somogyi
Author-X-Name-First: Fabricius
Author-X-Name-Last: Somogyi 
Title: Constrained liquidity provision in currency markets
Abstract: We study dealers’ liquidity provision in the currency market. We show that at times when dealers’ intermediation capacity is constrained their cost of liquidity provision increases disproportionately relative to dealer-provided volume. As a result, the elasticity of dealers’ liquidity provision drops by at least 80% relative to periods when they are unconstrained. We identify constrained periods based on leverage ratios, Value-at-Risk measures, credit default spreads, and debt funding costs. We interpret our novel empirical findings within a parsimonious model that sheds light on the key mechanisms of how liquidity provision by dealers tends to weaken when intermediary constraints are tightening. 
Creation-Date: 2023-02
File-URL: https://www.bis.org/publ/work1073.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1073.htm
File-Format: text/html
Number: 1073
Keywords: currency markets, dealer constraints, market liquidity, foreign exchange, liquidity provision
Classification-JEL: F31, G12, G15
Handle: RePEc:bis:biswps:1073