Anticipations of Foreign Exchange Volatility and Bid-Ask Spreads
AbstractThe paper studies the effect of the market's perceived exchange rate volatility on bid-ask spreads. The anticipated volatility is extracted from currency options data. An increase in the perceived volatility is found to widen bid-ask spreads. The direction of the effect is consistent with an option model of the spread, but the magnitude is smaller. An increase in trading volume of spot exchange rates also widens the spread. The omission of the trading volume, however, does not bias the estimate of the effect of the volatility on the spreads. Although the spread-volatility relation implied by the option model of the spread is close to linear, some form of nonlinearity can still be detected from the data.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4737.
Date of creation: May 1994
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- 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.).
- F31 - International Economics - - International Finance - - - Foreign Exchange
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Richard K. Lyons, 1993.
"Tests of Microstructural Hypotheses in the Foreign Exchange Market,"
NBER Working Papers
4471, National Bureau of Economic Research, Inc.
- Lyons, Richard K., 1995. "Tests of microstructural hypotheses in the foreign exchange market," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 321-351.
- Richard K. Lyons., 1993. "Tests of Microstructural Hypotheses in the Foreign Exchange Market," Research Program in Finance Working Papers RPF-230, University of California at Berkeley.
- Richard K. Lyons, 1986.
"Tests of the foreign exchange risk premium using the expected second moments implied by option pricing,"
International Finance Discussion Papers
290, Board of Governors of the Federal Reserve System (U.S.).
- Lyons, Richard K., 1988. "Tests of the foreign exchange risk premium using the expected second moments implied by option pricing," Journal of International Money and Finance, Elsevier, vol. 7(1), pages 91-108, March.
- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Glassman, Debra, 1987. "Exchange rate risk and transactions costs: Evidence from bid-ask spreads," Journal of International Money and Finance, Elsevier, vol. 6(4), pages 479-490, December.
- Black, Stanley W., 1991. "Transactions costs and vehicle currencies," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 512-526, December.
- Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, January.
- Boothe, Paul M, 1988. "Exchange Rate Risk and the Bid-Ask Spread: A Seven Country Comparison," Economic Inquiry, Western Economic Association International, vol. 26(3), pages 485-92, July.
- Melvin, Michael & Tan, Kok-Hui, 1996. "Foreign Exchange Market Bid-Ask Spreads and the Market Price of Social Unrest," Oxford Economic Papers, Oxford University Press, vol. 48(2), pages 329-41, April.
- Glosten, Lawrence R, 1987. " Components of the Bid-Ask Spread and the Statistical Properties of Transaction Prices," Journal of Finance, American Finance Association, vol. 42(5), pages 1293-1307, December.
- Detken, Carsten & Hartmann, Philipp, 2000.
"The euro and international capital markets,"
Working Paper Series
0019, European Central Bank.
- Detken, Carsten & Hartmann, Philipp, 2000. "The Euro and International Capital Markets," CEPR Discussion Papers 2461, C.E.P.R. Discussion Papers.
- Carsten Detken & Philipp Hartmann, 2000. "The Euro and International Capital Markets," EUI-RSCAS Working Papers 27, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
- Shang-Jin Wei & Jeffrey A. Frankel, 1991. "Are Option-Implied Forecasts of Exchange Rate Volatility Excessively Variable?," NBER Working Papers 3910, National Bureau of Economic Research, Inc.
- Geir Hoidal Bjonnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2003.
"Volume and Volatility in the FX Market: Does it matter who you are?,"
2003/7, Norges Bank.
- Geir H. Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2002. "Volume and Volatility in the FX-Market: Does it matter who you are?," CESifo Working Paper Series 786, CESifo Group Munich.
- Mende, Alexander, 2005.
"09/11 on the USD/EUR Foreign Exchange Market,"
Diskussionspapiere der Wirtschaftswissenschaftlichen FakultÃ¤t der Leibniz UniversitÃ¤t Hannover
dp-312, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
- TÃ¶rbjÃ¶rn I. Becker & Amadou N. R. Sy, 2005.
"Were Bid-Ask Spreads in the FX Market Excessive During the Asian Crisis?,"
IMF Working Papers
05/34, International Monetary Fund.
- Becker, Torbjorn & Sy, Amadou, 2006. "Were bid-ask spreads in the FX market excessive during the Asian crisis?," International Review of Financial Analysis, Elsevier, vol. 15(4-5), pages 434-449.
- David C. Parsley & Shang-Jin Wei, 1994. "Insignificant and Inconsequential Hysteresis: The Case of the U.S. Bilateral Trade," NBER Working Papers 4738, National Bureau of Economic Research, Inc.
- Detken, Carsten & Hartmann, Philipp, 2000. "The euro and international capital markets," CFS Working Paper Series 2000/09, Center for Financial Studies (CFS).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.