We propose a new method to estimate the bid-ask spread when quote data are not available. Compared to other low-frequency estimates, this method utilizes a wider information set, namely, readily available close, high, and low prices. In the absence of end-of-day quote data, this method generally provides the highest cross-sectional and average time-series correlations with the TAQ effective spread benchmark. Moreover, it delivers the most accurate estimates for less liquid stocks. Our estimator has many potential applications, including an accurate measurement of transaction cost, systematic liquidity risk, and commonality in liquidity for U.S. stocks dating back almost one century.

We provide the first systematic asset pricing analysis of one of the main safe asset categories, the repurchase agreement (repo). Based on the temporal and cross-sectional variation in short-term rates, we form a carry that, together with a market factor, prices these near-money assets in a linear pricing model. The carry depicts heterogeneity in nonpecuniary convenience yields of collateral assets and increases in the safety premium and the liquidity premium reflecting opportunity cost. Our carry helps explain the cross-section of short-term rates, as well as of long-term bond returns after accounting for standard bond pricing factors.

The search for a market design that ensures stable bank funding is at the top of regulators' policy agenda. This paper empirically shows that the central counterparty (CCP)-based euro interbank repo market features this stability. Using a unique and comprehensive data set, we show that the market is resilient during crisis episodes and may even act as a shock absorber, in the sense that repo lending increases with risk, while spreads, maturities, and haircuts remain stable. Our comparison across different repo markets shows that anonymous CCP-based trading, safe collateral, and the absence of an unwind mechanism are the key characteristics to ensure market resilience.

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.

This paper sheds light on a puzzling pattern in spot foreign exchange markets: domestic currencies appreciate (depreciate) systematically during foreign (domestic) working hours. This phenomenon spans many years and several exchange rates, and overrides calendar effects. We argue that it is mainly due to liquidity and inventory patterns that emerge from the combination of two factors: domestic agents tend to be net buyers of foreign currency and to trade mostly in their country’s working hours. The prevalence of domestic (foreign) traders demanding the counterpart currency during domestic (foreign) working hours implies sell-price (buy-price) pressure on the domestic currency during domestic (foreign) working hours.

We study high-frequency exchange rates over the period 1993–2008. Based on the recent literature on volatility and liquidity risk premia, we use a factor model to capture linear and non-linear linkages between currencies, stock and bond markets as well as proxies for market volatility and liquidity. We document that the Swiss franc and Japanese yen appreciate against the US dollar when US stock prices decrease and US bond prices and FX volatility increase. These safe haven properties materialise over different time granularities (from a few hours to several days) and non-linearly with the volatility factor and during crises. The latter effects were particularly discernible for the yen during the recent financial crisis.

We study the liquidity of the global currency market by analyzing the price impact of trading volume. We analyze a decade of CLS intraday data representative of global foreign exchange (FX) trading by developing a refinement of the popular Amihud (2002) illiquidity measure that we call realized Amihud, which is the ratio between realized volatility and trading volume. Inversely related to market depth, price impact increases with transaction costs, money market stress, uncertainty, and risk aversion. Furthermore, we analyze whether and how liquidity begets price efficiency by looking at violations of the “triangular” no-arbitrage condition. We find that dollar-based currencies offer a lower trading impact supporting price efficiency.

We analyze the effects of prudential regulation on short-term interest rates. The European Market Infrastructure Regulation (EMIR) induces clearing houses (CCPs) to supply large amounts of cash in reverse repurchase agreements (repos). Basel III, in contrast, disincentivizes the borrowing demand by tightening banks’ balance sheet constraints. Using unique regulatory data of CCP investment activity and repo transactions, we find compelling evidence for both the supply and demand channels. The overall effects are decreasing short-term rates and increasing market imbalances in various forms, all of which entail unintended consequences due to the new regulatory framework.

Using unique data at transaction and identity levels, we provide the first systematic study of interest rate swaps traded over the counter (OTC). We find substantial and persistent heterogeneity in derivative prices consistent with a pass-through of regulatory costs on to market prices via so-called valuation adjustments (XVA). A client pays a higher price to buy interest rate protection from a dealer (i.e., the client pays a higher fixed rate) if the contract is not cleared via a central counterparty. This OTC premium decreases by posting initial margins and with higher buyer’s creditworthiness. OTC premia are absent for dealers suggesting bargaining power.