IFin Seminar - Angelo Ranaldo, University of St. Gallen "Constrained Liquidity Provision in Currency Markets"

Institute of Finance

Date: 01.12.2022 / 12:25 - 13:40

Seminar Speaker:  Angelo Ranaldo, University of St. Gallen "Constrained Liquidity Provision in Currency Markets"

Date: 1.12.2022

Time: 12:25 - 13:40

Room: A-23 (Red Building)

USI West Campus

 

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 weakens 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.