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Trading volumes, volatility and spreads in foreign exchange markets: evidence from emerging market countries

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  • Gabriele Galati

Abstract

This paper provides empirical evidence on the relationship between trading volumes, volatility and bid-ask spreads in foreign exchange markets. It uses a new data set that includes daily data on trading volumes for the dollar exchange rates of seven currencies from emerging market countries. The sample period is 1 January 1998 to 30 June 1999. The results are broadly consistent with the findings of the literature that used futures volumes as proxies for total foreign exchange trading. I find that in most cases unexpected trading volumes and volatility are positively correlated, suggesting that both are driven by the arrival of public information, as predicted by the mixture of distributions hypothesis. I also find that the correlation between trading volumes and volatility is positive during "normal" periods but turns negative when volatility increases sharply. Finally, the results suggest that volatility and spreads are positively correlated, as suggested by inventory cost models. However, contrary to the prediction of these models, I do not find evidence of a significant impact of unexpected trading volumes on spreads.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 93.

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Length: 44 pages
Date of creation: Oct 2000
Date of revision:
Handle: RePEc:bis:biswps:93

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  1. Grammatikos, Theoharry & Saunders, Anthony, 1986. "Futures Price Variability: A Test of Maturity and Volume Effects," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(2), pages 319-30, April.
  2. Shang-Jin Wei, 1991. "Anticipations of foreign exchange volatility and bid-ask spreads," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 409, Board of Governors of the Federal Reserve System (U.S.).
  3. Yin-Wong Cheung & Menzie D. Chinn, 1999. "Traders, Market Microstructure and Exchange Rate Dynamics," NBER Working Papers 7416, National Bureau of Economic Research, Inc.
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Cited by:
  1. Park, Beum-Jo, 2010. "Surprising information, the MDH, and the relationship between volatility and trading volume," Journal of Financial Markets, Elsevier, Elsevier, vol. 13(3), pages 344-366, August.
  2. Olivier Damette, 2009. "Exchange rate volatility and noise traders: Currency Transaction Tax as an eviction device," Economics Bulletin, AccessEcon, vol. 29(3), pages 2449-2464.
  3. BAUWENS, Luc & RIME, Dagfinn & SUCARRAT, Genaro, . "Exchange rate volatility and the mixture of distribution hypothesis," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1788, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Becker, Torbjorn & Sy, Amadou, 2006. "Were bid-ask spreads in the FX market excessive during the Asian crisis?," International Review of Financial Analysis, Elsevier, Elsevier, vol. 15(4-5), pages 434-449.
  5. Loredana Ureche-Rangau & Fabien Collado & Ulysse Galiay, 2011. "The dynamics of the volatility – trading volume relationship: New evidence from developed and emerging markets," Economics Bulletin, AccessEcon, vol. 31(3), pages 2569-2583.
  6. Dagfinn Rime & Genaro Sucarrat, 2007. "Exchange rate variability, market activity and heterogeneity," Economics Working Papers, Universidad Carlos III, Departamento de Economía we077039, Universidad Carlos III, Departamento de Economía.
  7. Antonio Scalia, 2006. "Is foreign exchange intervention effective? Some micro-analytical evidence from the Czech Republic," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 579, Bank of Italy, Economic Research and International Relations Area.
  8. Mende, Alexander, 2005. "09/11 on the USD/EUR Foreign Exchange Market," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-312, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  9. Imen Kouki & Hélène Raymond, 2006. "Analyse microstructurelle du comportement du teneur de marché des changes : étude intra-journalière de l'activité d'un teneur de marché tunisien," EconomiX Working Papers, University of Paris West - Nanterre la Défense, EconomiX 2006-14, University of Paris West - Nanterre la Défense, EconomiX.
  10. Francis Bismans & Olivier Damette, 2012. "La taxe Tobin : une synthèse des travaux basés sur la théorie des jeux et l’économétrie," Working Papers of BETA 2012-09, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  11. 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.
  12. Koutmos, Gregory & Martin, Anna D., 2011. "Currency bid-ask spread dynamics and the Asian crisis: Evidence across currency regimes," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(1), pages 62-73, February.
  13. Beum-Jo Park, 2007. "Trading Volume, Volatility, And Garch Effects In The South Korean Won/Us Dollar Exchange Market: Evidence From Conditional Quantile Estimation," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 58(3), pages 382-399.

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