The foreign exchange market
: A three essay analysis

  • Hsin-Yen Wen

Student thesis: Doctoral ThesisDoctor of Philosophy


Illiquidity in financial markets is an issue of importance given that its impact can be rapid, that it can result in the emergence of a financial crisis, and that ultimately, it can threaten financial system stability. I construct five measures of FX illiquidity using high frequency transactable FX data for five of the most actively traded currencies by trading volume. I construct the index using principal component analysis. I examine the impact of FX pair illiquidity on equity market return. A negative relationship is expected; FX pair illiquidity has a spillover effect on equity market illiquidity that then affects equity market returns.

If currency pairs are integrated this may result in a illiquidity effect in one country transmitting to another (Illiquidity contagion), with the problem exacerbated if illiquidity during one period leads to illiquidity in the next (Illiquidity spiral). I explore for the existence of an illiquidity spiral in the FX market by testing the relationship between the FX market illiquidity index. These results provide evidence that an increase in investor uncertainty in a prior period, and an increase in the funding illiquidity in a prior period, are followed in the next period by significant FX market-wide illiquidity. These results provide evidence of illiquidity spiral.

I analyze the impact of three components of the RMB/USD FX on US/Chinese industries and sectors during an before the current tariff retaliation period up to the COVID-19 pandemic. The results provide important policy implications. The results show a consistent statistically and economically significant negative impact on US/China industries/sectors of FX return and volatility but no liquidity. The results show that tariff retaliation between the US and China has increased the impact of FX returns and volatility on industries/sectors in both countries, with a stronger economic impact on China, especially during the retaliation period.
Date of AwardJul 2021
Original languageEnglish
Awarding Institution
  • Queen's University Belfast
SupervisorDonal McKillop (Supervisor) & Barry Quinn (Supervisor)


  • Foreign exchange market
  • FX Illiquidity
  • FX Illiquidity measurements
  • illiquidity contagion
  • illiquidity spiral
  • US/China trade war
  • US/China tariff retaliation

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