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Analysis of spreads in the Dollar/Euro and Deutsche Mark/Dollar foreign exchange markets

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  • Richard Payne
  • Charles Goodhart

    ()

  • Dagfinn Rime

Abstract

This paper tries to provide a simple explanation for the empirical finding, documented here and also by Hau, Killeen and Moore (2002), that spreads in the spot USD/EUR market are substantially higher than those in the preceding DEM/USD foreign exchange market. The paper argues that it is primarily the re-factoring of the exchange rate, 1.75 DEM per USD compared to 1 USD per EUR together with the fact that dealers are faced with a minimum tick size, that has caused spreads to increase (as a percentage of mid-quote).

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp467.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp467.

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Date of creation: Feb 2002
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Handle: RePEc:fmg:fmgdps:dp467

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Web page: http://www.lse.ac.uk/fmg/

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  1. Richard Portes & Hélène Rey, 1998. "The emergence of the euro as an international currency," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 13(26), pages 305-343, 04.
  2. Christie, William G & Schultz, Paul H, 1994. " Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1813-40, December.
  3. Richard K. Lyons., 1993. "Tests of Microstructural Hypotheses in the Foreign Exchange Market," Research Program in Finance Working Papers, University of California at Berkeley RPF-230, University of California at Berkeley.
  4. Hau, Harald & Killeen, William & Moore, Michael J, 2000. "The Euro as an International Currency: Explaining Puzzling First Evidence," CEPR Discussion Papers 2510, C.E.P.R. Discussion Papers.
  5. Andersen T. G & Bollerslev T. & Diebold F. X & Labys P., 2001. "The Distribution of Realized Exchange Rate Volatility," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 96, pages 42-55, March.
  6. Huang, Roger D & Stoll, Hans R, 1997. "The Components of the Bid-Ask Spread: A General Approach," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 995-1034.
  7. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
  8. Perron, P., 1989. "Testing For A Unit Root In A Time Series With A Changing Mean," Papers, Princeton, Department of Economics - Econometric Research Program 347, Princeton, Department of Economics - Econometric Research Program.
  9. Michael A. Goldstein & Kenneth A. Kavajecz, . "Eighths, Sixteenths and Market Depth: Changes in Tick Size and Liquidity Provision on the NYSE," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 14-98, Wharton School Rodney L. White Center for Financial Research.
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Citations

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Cited by:
  1. Hoidal Bjonnes, Geir & Rime, Dagfinn, 2003. "Dealer Behavior and Trading Systems in Foreign Exchange Markets," SIFR Research Report Series, Institute for Financial Research 17, Institute for Financial Research.
  2. Carol Osler & Alexander Mende & Lukas Menkhoff, 2010. "Price Discovery in Currency Markets," Working Papers, Brandeis University, Department of Economics and International Businesss School 03, Brandeis University, Department of Economics and International Businesss School.
  3. Geir H. Bjønnes & Carol L. Osler & Dagfinn Rime, 2009. "Asymmetric information in the interbank foreign exchange market," Working Paper, Norges Bank 2008/25, Norges Bank.
  4. McGroarty, Frank & ap Gwilym, Owain & Thomas, Stephen, 2006. "Microstructure effects, bid-ask spreads and volatility in the spot foreign exchange market pre and post-EMU," Global Finance Journal, Elsevier, vol. 17(1), pages 23-49, September.
  5. Kaul, Aditya & Sapp, Stephen, 2006. "Y2K fears and safe haven trading of the U.S. dollar," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 760-779, August.
  6. Poskitt, Russell, 2005. "Bid/ask spreads in the foreign exchange market: An alternative interpretation," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 13(5), pages 562-583, November.
  7. Ding, Liang & Hiltrop, Jonas, 2010. "The electronic trading systems and bid-ask spreads in the foreign exchange market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 323-345, October.

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