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  • Market liquidity risks of foreign exchange derivatives and cross-country equity portfolio allocations

    Author(s)
    Thapa, Chandra
    Neupane, Suman
    Marshall, Andrew
    Griffith University Author(s)
    Neupane, Suman
    Year published
    2016
    Metadata
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    Abstract
    Foreign exchange derivatives (FXD) are important tools for hedging foreign exchange (FX) risks and enhancing returns of international portfolios. However, the ability to use FXD can be constrained by higher trading costs and the liquidity risks of the FXD available in different markets/currencies across countries. In this study, we investigate whether the wide cross-sectional and temporal variations observed in the liquidity level of FXD markets are associated with the cross-country allocation decisions of foreign portfolio investors. Using an extensive dataset of 40 countries and a number of alternative specifications, our ...
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    Foreign exchange derivatives (FXD) are important tools for hedging foreign exchange (FX) risks and enhancing returns of international portfolios. However, the ability to use FXD can be constrained by higher trading costs and the liquidity risks of the FXD available in different markets/currencies across countries. In this study, we investigate whether the wide cross-sectional and temporal variations observed in the liquidity level of FXD markets are associated with the cross-country allocation decisions of foreign portfolio investors. Using an extensive dataset of 40 countries and a number of alternative specifications, our study finds that investors tend to allocate more wealth in countries that provide liquid and cost-effective opportunities for using FXD. Our results suggest that regulatory reforms aimed at developing FXD markets could be a potential policy measure for attracting higher levels of foreign equity portfolio investments.
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    Journal Title
    Journal of Multinational Financial Management
    Volume
    34
    DOI
    https://doi.org/10.1016/j.mulfin.2016.01.001
    Subject
    Banking, finance and investment
    Banking, finance and investment not elsewhere classified
    Foreign equity portfolio allocations
    Foreign exchange derivatives
    Market liquidity risks
    Publication URI
    http://hdl.handle.net/10072/100173
    Collection
    • Journal articles

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