Asymmetric liquidity risk and currency returns before and during COVID-19 pandemic

Palwishah, Rana; Kashif, Muhammad; Rehman, Mobeen Ur; Al-Faryan, Mamdouh Abdulaziz Saleh

Abstract

Motivated by the asymmetric nature of liquidity and currency return, we set out a new liquidity-adjusted extreme risk asset pricing model. Our model estimates asymmetric risk using downside beta, downside co-skewness, and excess co-kurtosis. The empirical finding strongly supports the extreme liquidity risk measures to explain the carry trade. Thus confirming that to capture better the extreme risk exposure in liquidity and currency return, it is necessary to highlight asymmetries across up and down markets using downside co-skewness and excess kurtosis. Further, we found their effect to be more pronounced during the COVID-19 period. Therefore, ignoring these exposures, especially during crises, will lead to risk and return profile, deviating from its true nature.

Citation

Palwishah, R., Kashif, M., Rehman, M. U., & Al-Faryan, M. A. S. (2024). Asymmetric liquidity risk and currency returns before and during COVID-19 pandemic. International Review of Financial Analysis, 91, Article 102919. https://doi.org/10.1016/j.irfa.2023.102919

• Journal Article Type: Article
• Acceptance Date: Sep 6, 2023
• Online Publication Date: Sep 9, 2023
• Publication Date: 2024-01
• Deposit Date: Aug 9, 2024
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 91
• Article Number: 102919
• DOI: https://doi.org/10.1016/j.irfa.2023.102919
• Public URL: https://keele-repository.worktribe.com/output/877071
• Additional Information: This article is maintained by: Elsevier; Article Title: Asymmetric liquidity risk and currency returns before and during COVID-19 pandemic; Journal Title: International Review of Financial Analysis; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.irfa.2023.102919; Content Type: article; Copyright: © 2023 Elsevier Inc. All rights reserved.