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Spread Components in the Hungarian Forint-Euro Market

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  • Frederick Van Gysegem

    (Ghent University, BELGIUM)

  • Michael Frömmel

    (Ghent University, BELGIUM)

Abstract

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.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1260.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1260

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Cited by:
  1. Carol Osler & Xuhang Wang, 2012. "The Microstructure of Currency Markets," Working Papers, Brandeis University, Department of Economics and International Businesss School 49, Brandeis University, Department of Economics and International Businesss School.
  2. M. Frömmel & F Van Gysegem, 2014. "Bid-Ask Spread Components on the Foreign Exchange Market: Quantifying the Risk Component," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 14/878, Ghent University, Faculty of Economics and Business Administration.

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