Spread Components in the Hungarian Forint-Euro Market
AbstractWe 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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Bibliographic InfoPaper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 11/709.
Length: 24 pages
Date of creation: Feb 2011
Date of revision:
microstructure; foreign exchange; spread; Hungary; inventory; adverse selection;
Other versions of this item:
- Michael Frömmel & Frederick Van Gysegem, 2012. "Spread Components in the Hungarian Forint-Euro Market," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 48(3), pages 52-69, May.
- Frederick Van Gysegem & Michael Frömmel, 2011. "Spread Components in the Hungarian Forint-Euro Market," 2011 Meeting Papers 1260, Society for Economic Dynamics.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-05-14 (All new papers)
- NEP-IFN-2011-05-14 (International Finance)
- NEP-TRA-2011-05-14 (Transition Economics)
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