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The Components of Electronic Inter-Dealer Spot FX Bid-Ask Spreads

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  • Frank McGroarty
  • Owain ap Gwilym
  • Stephen Thomas

Abstract

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.

Suggested Citation

  • Frank McGroarty & Owain ap Gwilym & Stephen Thomas, 2007. "The Components of Electronic Inter-Dealer Spot FX Bid-Ask Spreads," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(9-10), pages 1635-1650.
  • Handle: RePEc:bla:jbfnac:v:34:y:2007-11:i:9-10:p:1635-1650
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    References listed on IDEAS

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    1. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
    2. Hartmann,Philipp, 2007. "Currency Competition and Foreign Exchange Markets," Cambridge Books, Cambridge University Press, number 9780521046930, August.
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    Cited by:

    1. Michael Bleaney & Zhiyong Li, 2016. "Decomposing the Bid–ask Spread in Multi‐Dealer Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(1), pages 75-89, January.
    2. McGroarty, Frank & ap Gwilym, Owain & Thomas, Stephen, 2009. "The role of private information in return volatility, bid-ask spreads and price levels in the foreign exchange market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(2), pages 387-401, April.
    3. McGroarty, Frank & ap Gwilym, Owain & Thomas, Steve, 2010. "Market structure and microstructure, in international interest rate futures markets," Research in International Business and Finance, Elsevier, vol. 24(3), pages 253-266, September.
    4. Michael Frömmel & Frederick Van Gysegem, 2012. "Spread Components in the Hungarian Forint-Euro Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(3), pages 52-69, May.

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