Relationship between liquidity and volatility of selected exchange rate pairs
|Author:||Bc. Martin Kotek|
|Year:||2014 - summer|
|Leaders:|| prof. PhDr. Ladislav Krištoufek Ph.D.
|Work type:|| Bachelors
|Awards and prizes:||B.A. with distinction from the Dean of the Faculty of Social Sciences for an extraordinarily good bachelors diploma thesis.|
|Abstract:||The thesis explores relationship between volatility and liquidity of ten selected exchange rate pairs.
Several volatility and liquidity measures are computed and the relationship between volatility-liquidity
pairs is tested for cointegration and Granger causality; impulse response functions are computed as well.
We find that volatility measures provide similar information (are cointegrated), while volatility measures
differ to a large extent. A few cointegrating relationships between volatility and liquidity are found, but
they are specific to only some currency pairs. Granger causality tests give different results for different
currency pairs, but in general, the relationship between volatility and liquidity is two-way (feedback).
Shocks in volatility or liquidity have little impact on the other and quickly fade away, usually within one
or two days