The foreign exchange (FX) market is considered to be the largest and presumably most liquid financial market in the world. We show that even in this market exposure to liquidity risk commands a non-trivial risk premium of up to 3.6% per annum. In particular, systematic and currency-specific...

We investigate the relation between foreign exchange (FX) order flow and the forward bias. We outline a decomposition of the forward bias according to which a negative correlation between interest rate differentials and order flow creates a time-varying risk premium consistent with that bias....

We identify a global risk factor in the cross-section of implied volatility returns in currency markets. A zero-cost strategy that buys forward volatility agreements with downward sloping implied volatility curves and sells those with upward slopes - volatility carry strategy - generates...

I show that volatility risk of the dollar factor --- an equally weighted basket of developed U.S. dollar exchange rates --- carries a significant risk premium and that it is priced in the cross-section of currency volatility excess returns. The dollar factor volatility risk premium is negative...

The misevaluation of risk in securitized financial products is central to understanding the financial crisis of 2007 - 8. This paper characterizes the evolution of factors affecting collateralized debt obligations based on subprime mortgages. A key feature of subprime-mortgage backed indices is...

The misevaluation of risk in securitized financial products is central to understanding the Financial Crisis of 2007-2008. This paper characterizes the evolution of factors affecting collateralized debt obligations (CDOs) based on subprime mortgages. A key feature of subprime-mortgage backed...

This paper examines the dynamic linkages among major exchange rates during the Global Financial Crisis and Eurozone Sovereign Debt Crisis. We extend the previous literature on volatility spillover linkages among the currencies by taking into account the uncovered interest-rate parity hypothesis...

Using a broad data set of 20 US dollar exchange rates and order flow of institutional investors over 14 years, we construct a measure of global liquidity risk in the foreign exchange (FX) market. Our FX liquidity measure may be seen as the analogue of the well-known Pastor-Stambaugh liquidity...

This paper presents the first comprehensive examination of liquidity in the global foreign exchange (FX) swap market. Our analysis employs effective measures that assess both the tightness and depth of the global market. We identify three main findings: First, FX swap liquidity is fragmented...

Separate literatures study violations of uncovered interest parity using regression-based and portfolio-based methods. We propose a decomposition of these violations into a cross-currency, a between-time-and-currency, and a cross-time component that allows us to analytically relate...