The Components of Electronic Inter-Dealer Spot FX Bid-Ask Spreads
This paper applies an established bid-ask spread decomposition model to the inter-dealer spot foreign exchange market. In addition, the paper presents and tests a modified decomposition model which is specifically adapted to the features of order-driven markets and which is found to produce more plausible results than the original model. Price clustering is introduced as a new explanatory factor within this framework and is shown to be vitally important in understanding the composition of bid-ask spreads in this market. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.
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Volume (Year): 34 (2007-11)
Issue (Month): 9-10 ()
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