Article, 2024

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

International Review of Financial Analysis, ISSN 1873-8079, 1057-5219, Volume 91, Page 102919, 10.1016/j.irfa.2023.102919

Contributors

Palwishah, Rana [1] Kashif, Muhammad 0000-0002-4739-9894 [2] Rehman, Mobeen Ur 0000-0003-0914-7132 (Corresponding author) [3] Al-Faryan, Mamdouh Abdulaziz Saleh 0000-0003-1665-807X [4] [5]

Affiliations

  1. [1] Shaheed Zulfiqar Ali Bhutto Institute of Science and Technology
    2. [NORA names: Pakistan; Asia, South];
  2. [2] University of Southern Denmark
    3. [NORA names: SDU University of Southern Denmark; University; Denmark; Europe, EU; Nordic; OECD];
  3. [3] SZABIST University, Islamabad, Pakistan
    4. [NORA names: Pakistan; Asia, South];
  4. [4] Consultant in Economics and Finance. Riyadh, Saudi Arabia.
    5. [NORA names: Saudi Arabia; Asia, Middle East];
  5. [5] University of Portsmouth
    6. [NORA names: United Kingdom; Europe, Non-EU; OECD]

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.

Keywords

COVID-19, COVID-19 pandemic, COVID-19 period, asset pricing model, assets, asymmetric nature, asymmetric risk, asymmetry, beta, co-kurtosis, co-skewness, crisis, currency, currency returns, downside beta, downsides, effect, empirical findings, excess kurtosis, exposure, findings, kurtosis, liquid, liquidity risk, liquidity risk measures, market, measurements, model, nature, pandemic, period, pricing model, profile, return, return profile, risk, risk exposure, risk measures, trade

Data Provider: Digital Science

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