Existing models of market participation offer contrasting predictions on the impact of asset price volatility on market participation. Utilising granular trading data from the Thai foreign exchange (FX) market, we test the empirical relevance of these predictions. We find that the volatility of the US dollar–Thai baht exchange rate has a positive effect on market participation measured by trading volume and average transaction size. This finding is consistent with the models illustrating that volatility increases participation as it creates profit-making opportunities. The result is robust to controlling for information flow that may generate a positive but non-causal relationship between volatility and participation. We also find heterogeneity across participant types. In particular, the impact of FX volatility on trading volume is positive for foreign end-customers and interbank players, but negative for local end-customers. This heterogeneity is explained by different purposes of FX transactions: financial returns for the former and real demand for the latter. Finally, we show that the impact of volatility on trading volume turns negative at high levels of volatility and during a period of high regulatory uncertainty.

This paper examines how Chinese banks used on-balance sheet shadow loans for regulatory arbitrage and whether the financial market priced in the banks’ use of shadow loans and the resulting vulnerabilities in 2014–2022. It finds that banks chose to window dress their regulatory capital ratio by using shadow loans when their capital adequacy ratio was close to the regulatory minimum. It also shows that banks with a higher shadow loan ratio or a lower breakeven non-performing loan ratio obtained from reverse stress testing faced higher wholesale funding costs. Finally, after the announcement of a rare bank failure event, more vulnerable banks witnessed lower cumulative stock and bond returns.

This paper investigates the impact of CDS trading on the development of the bond market in Asia. In general, CDS trading has lowered the cost of issuing bonds and enhanced the liquidity in the bond market. The positive impact is stronger for smaller firms, non-financial firms and those firms with higher liquidity in the CDS market. These empirical findings support the diversification and information hypotheses in the literature. Nevertheless, CDS trading has also introduced a new source of risk. There is strong evidence that, at the peak of the recent global financial crisis, those firms included in CDS indices faced higher bond yield spreads than those not included.

Using quarterly data on macroprudential policy (MaPP) measures and capital flow management measures (CFMs) in 39 economies over 2000–2020, we analyse how domestic credit and cross-border capital flows respond to such measures. We distinguish price- and quantity-based MaPP measures and CFMs, and examine if the level of financial development matters in explaining policy effectiveness. Tightening MaPP measures significantly reduce household credit when the level of financial development is relatively low, and this is driven more by price-based MaPP measures. Also, price- and quantity-based CFMs slow down bank inflows with the former effective at relatively low levels of financial development and the latter at relatively high levels. Finally, we present evidence on leakages associated with quantity-based measures. Tightening quantity-based CFMs increases offshore bond issuance when the level of financial development is relatively low, while tightening quantity-based MaPP measures increase bank and bond inflows when financial development is relatively high.