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Exchange Rate Risk and the Bid-Ask Spread: A Seven Country Comparison

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  • Boothe, Paul M
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    Abstract

    This paper studies the determination of exchange market transaction costs. Using a large data set including seven currencies, it provide s empirical support for the theoretical prediction of a positive relationship between the level of uncertainty regarding future prices and current transaction costs. In contrast to most previous work, it considers explicitly the problem of omitted transactions volume, showing that while estimators are les s efficient and potentially inconsistent in the absence of the unavailable variable, the direction of potential coefficient bias is such that hypothesis tests regarding the importance of uncertainty are rendered more conservative. Copyright 1988 by Oxford University Press.

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    Bibliographic Info

    Article provided by Western Economic Association International in its journal Economic Inquiry.

    Volume (Year): 26 (1988)
    Issue (Month): 3 (July)
    Pages: 485-92

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    Handle: RePEc:oup:ecinqu:v:26:y:1988:i:3:p:485-92

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    Cited by:
    1. Detken, Carsten & Hartmann, Philipp, 2000. "The euro and international capital markets," Working Paper Series 0019, European Central Bank.
    2. Törbjörn I. Becker & Amadou N. R. Sy, 2005. "Were Bid-Ask Spreads in the Foreign Exchange Market Excessive During the Asian Crisis?," IMF Working Papers 05/34, International Monetary Fund.
    3. C. Yiu & S. Wong & K. Chau, 2009. "Transaction Volume and Price Dispersion in the Presale and Spot Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 38(3), pages 241-253, April.
    4. Detken, Carsten & Hartmann, Philipp, 2000. "The euro and international capital markets," CFS Working Paper Series 2000/09, Center for Financial Studies (CFS).
    5. Gianluca Marcato & Charles Ward, 2006. "Back from Beyond the Bid-Ask Spread: Perspectives on Liquidity," Real Estate & Planning Working Papers rep-wp2006-15, Henley Business School, Reading University.
    6. Bollerslev, Tim & Domowitz, Ian & Wang, Jianxin, 1997. "Order flow and the bid-ask spread: An empirical probability model of screen-based trading," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1471-1491, June.
    7. Khemraj, Tarron & Pasha, Sukrishnalall, 2008. "Foreign exchange market bid-ask spread and market power in an underdeveloped economy," MPRA Paper 11422, University Library of Munich, Germany.
    8. Gianluca Marcato & Charles Ward, 2007. "Back from Beyond the Bid-Ask Spread: Estimating Liquidity in International Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(4), pages 599-622, December.
    9. Aliber, Robert Z. & Chowdhry, Bhagwan & Yan, Shu, 2000. "Transactions Costs in the Foreign Exchange Market," University of California at Los Angeles, Anderson Graduate School of Management qt4qw3p6rp, Anderson Graduate School of Management, UCLA.
    10. Ali Kutan & Su Zhou, 1995. "Sociopolitical instability, volatility, and the bid-ask spread: Evidence from the free market for dollars in Poland," Open Economies Review, Springer, vol. 6(3), pages 225-236, July.
    11. Shang-Jin Wei, 1991. "Anticipations of foreign exchange volatility and bid-ask spreads," International Finance Discussion Papers 409, Board of Governors of the Federal Reserve System (U.S.).
    12. Alex Frino & Elvis Jarnecic & Hui Zheng, 2010. "Activity in futures: does underlying market size relate to futures trading volume?," Review of Quantitative Finance and Accounting, Springer, vol. 34(3), pages 313-325, April.
    13. Hau, Harald & Killeen, William & Moore, Michael, 2002. "The euro as an international currency: explaining puzzling first evidence from the foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 21(3), pages 351-383, June.

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