The Review of Financial Studies, 28 (11), 2015, 3073-3108
We provide a comprehensive study of the liquidity of spot foreign exchange (FX) rates over more than two decades and a large cross-section of currencies. First, we show that FX liquidity can be accurately measured with daily and readily available data. Second, we demonstrate that FX liquidity declines with funding constraints and global risk, supporting theoretical models relating funding and market liquidity. In these distressed circumstances, liquidity tends to evaporate more for developed and riskier currencies. Finally, we show stronger comovements of FX liquidities in distressed markets, especially when funding is constrained, volatility is high, and FX speculators incur losses.
Talks: Financial Economics Workshop, Lund, 2013 | Measuring and Modeling Financial Risk with High Frequency Data Workshop, Florence, 2013 |
Aarhus University, 2013 | Financial Determinants of Exchange Rates Workshop, Rome, 2013 | SGF Conference, Zürich, 2014 |
SNB-UZH Workshop, Zürich, 2014 | Microstructure of Financial Markets Workshop, Rome, 2014 | AFA, Boston, 2015
Prize for the best dissertation in PhD Program in Economics and Finance (PEF) 2017, St. Gallen
I find that the U.S. dollar appreciates over the two-day period before contractionary monetary policy decisions at scheduled Federal Open Market Committee (FOMC) meetings and depreciates over the two-day period before expansionary monetary policy decisions. The federal funds futures rate forecasts these dollar movements with a 22% R-squared. A high federal funds futures spread three days in advance of an FOMC meeting not only predicts the target rate rise, but also predicts a rise in the dollar over the subsequent two-day period. A simple trading strategy, which exploits this predictability, exhibits a 0.93 Sharpe ratio. My findings imply that information about monetary policy changes is reflected first in the fixed income markets, and only later becomes reflected in currency markets.
Talks: Wharton School, 2016 | Philadelphia Federal Reserve Bank, 2016 | University of Mannheim, 2016 | University of St. Gallen, 2016 |
Goethe University Frankfurt, 2016 | HEC Lausanne, 2016 | AFA PhD poster session, 2017 | Midwest Finance Association, 2017 |
Southern Methodist University, 2017 | Norwegian School of Economics, 2017 | Stockholm School of Economics, 2017 | WashU in St. Louis, 2017 |
Ohio State University, 2017 | University of Oregon, 2017 | Cornerstone Research, 2017 | University of Virginia (McIntire), 2017 |
Macro Finance Modeling summer session, 2017 | Multinational Finance Society, 2018 | Australian Finance and Banking Conference, 2018 |
I study the relationship between GDP growth forecasts by the Blue Chip professionals and news about future monetary policy, defined as changes in up to one-year interest rate futures in a 30-minute window around scheduled Federal Open Market Committee (FOMC) announcements. I find that professionals' revisions in one-year-ahead growth expectations predict 15% of variation in policy news shocks. A positive GDP growth revision predicts a contractionary policy news shock, a negative GDP growth revision predicts an expansionary policy news shock. Failing to account for this predictability biases the estimates of monetary policy effects on the economy: the orthogonal policy news shock does not affect professionals' beliefs about the economy and has a more negative impact on future actual GDP, than the raw policy shock. Overall, my results suggest that bond yields are slow to incorporate updates in professionals' growth expectations.
Talks: Oxford-NY Fed Monetary Economics Conference, 2019 | Bank of Japan, 2019 | Australian Finance and Banking Conference, 2019
This paper investigates a link between the most popular currency strategies (carry trade, momentum, value) and sovereign ratings. I document that the profitability of the momentum strategy is large and significant among higher credit risk currencies, but is nonexistent among lower credit risk currencies. The profitability of currency momentum disappears when currencies rated BBB- or worse (16% of currency months) are excluded from the sample. The country credit risk conditions do not apply to the carry trade and value, which are profitable among lower and higher credit risk currencies. Sovereign rating changes do not have a significant impact on the performance of the most popular currency strategies.
Talks: University of St. Gallen, 2015 | Financial Economics Workshop, Lund, 2015 | Wharton School, 2015