The Components of Electronic Inter‐Dealer Spot FX Bid‐Ask Spreads

McGroarty, Frank; Gwilym, Owain ap; Thomas, Stephen

doi:10.1111/j.1468-5957.2007.02051.x

Cited by 10 publications

(10 citation statements)

References 32 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Although the share of the inventory holding premium on the HUF/EUR market is of comparable size as found by McGroarty et al (2007) for major markets, it should be stressed that it is larger in absolute terms, due to the larger spread on the HUF/EUR market. While according to their results the share of inventory effects in the total costs of a one million EUR round trade normally does not exceed 87 EUR 6 we find costs of 168.38 EUR (40.09% of 420 EUR).…”

Section: Resultsmentioning

confidence: 61%

Spread Components in the Hungarian Forint-Euro Market

Frömmel

Gysegem

2012

Emerging Markets Finance and Trade

View full text Add to dashboard Cite

We apply the spread decomposition model by Huang and Stoll (1997) to a new dataset on the Hungarian Forint/Euro interbank market. In contrast to previous results we cover a minor market over a long time span. We find a significant inventory effect, which can be explained by the low number of trades per day and thus the long time between offsetting trades. The trading volume increased gradually during our sample period and coincided with a decreasing spread. We find that spread size increases significantly with trade size, in contrast to previous research on the customer market. We show that this increase is caused by rising inventory holding and adverse selection costs.Overall this work confirms the predictions from various theoretical models on a small and less liquid market. When comparing with other results the size of the market, institutional differences between markets and specificities of a dataset seem to play an important role.

show abstract

Section: Resultsmentioning

confidence: 61%

Spread Components in the Hungarian Forint-Euro Market

Frömmel

Gysegem

2012

Emerging Markets Finance and Trade

View full text Add to dashboard Cite

show abstract

“…In microstructure literature, the bid-ask spread has three components (Huang and Stoll, 1997): one covers the fixed costs, for example exchange fees; another covers the costs associated with holding large inventory of the asset; the third covers the costs associated with adverse information. In currency markets, the estimates of the first two components range from 50 to 80 per cent, for example McGroarty et al (2007). The uncertainty associated with commodity prices and carry trades is reflected in the adverse-information component.…”

Section: B Asian Currency Liquiditymentioning

confidence: 99%

“…In currency markets, the estimates of the first two components range from 50 to 80 per cent, for example McGroarty et al. (). The uncertainty associated with commodity prices and carry trades is reflected in the adverse‐information component.…”

Section: Impact Of Commodity Price and Carry Tradementioning

confidence: 99%

Commodity Price, Carry Trade, and the Volatility and Liquidity of Asian Currencies

2013

View full text Add to dashboard Cite

This study examines how the volatility and liquidity of 10 Asian exchange rates against the US dollar change with volatilities in commodity price and carry trade over the period of January 2000 to June 2010. We find that uncertainties in commodity markets and carry trades are significantly correlated with the volatilities and the bid‐ask spreads of most Asian currencies. The correlation with carry trade is generally stronger and has been rising over the sample period. While high volatilities in carry trade are associated with high volatilities in many Asian currencies, high volatilities in commodity price do not coincide with excessive volatilities in Asian currencies. This suggests that investors and policymakers should be more concerned with the volatility in carry trade.

show abstract

“…The spread varies significantly with the time of day, but the inventory control and asymmetric information components do not.differently. For example, McGroarty et al (2007) develop an alternative model for decomposing the spread specifically designed for order-driven intra-dealer markets like the EBS. Their model uses the price difference between the best buy-and-sell limit orders as the measure of the spread and then re-interprets one of the HS equations to estimate the decomposition.…”

mentioning

confidence: 99%

Decomposing the Bid–ask Spread in Multi‐Dealer Markets

Bleaney

2015

Int. J Fin Econ

View full text Add to dashboard Cite

In this paper, we modify the Huang and Stoll (1997) spread-decomposing model to fit multi-dealer markets. In a multi-dealer market, individual dealers can rebalance their inventories either by trading with other dealers or changing the quote price. Our modified model captures this feature. Using transaction data from the Reuters D2000-1 system, we find that the order-processing and inventory control components of the spread in the foreign exchange market are relatively small and dealers may tolerate the unwanted inventory to keep the spread small to attract informed orders. The asymmetric information component carries the biggest weight.We study the time pattern of the spread and its components. The spread varies significantly with the time of day, but the inventory control and asymmetric information components do not.

show abstract

The Components of Electronic Inter‐Dealer Spot FX Bid‐Ask Spreads

Cited by 10 publications

References 32 publications

Spread Components in the Hungarian Forint-Euro Market

Spread Components in the Hungarian Forint-Euro Market

Commodity Price, Carry Trade, and the Volatility and Liquidity of Asian Currencies

Decomposing the Bid–ask Spread in Multi‐Dealer Markets

Contact Info

Product

Resources

About