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Bid-ask spread dynamics in foreign exchange markets

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  • Chelley-Steeley, Patricia L.
  • Tsorakidis, Nikos

Abstract

The aim of this paper is to examine the short term dynamics of foreign exchange rate spreads. Using a vector autoregressive model (VAR) we show that most of the variation in the spread comes from the long run dependencies between past and future spreads rather than being caused by changes in inventory, adverse selection, cost of carry or order processing costs. We apply the Integrated Cumulative Sum of Squares (ICSS) algorithm of Inclan and Tiao (1994) to discover how often spread volatility changes. We find that spread volatility shifts are relatively uncommon and shifts in one currency spread tend not to spillover to other currency spreads.

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  • Chelley-Steeley, Patricia L. & Tsorakidis, Nikos, 2013. "Bid-ask spread dynamics in foreign exchange markets," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 119-131.
    • Handle: RePEc:eee:finana:v:29:y:2013:i:c:p:119-131
    DOI: 10.1016/j.irfa.2013.02.003
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    Cited by:

    1. Rob Hayward, 2018. "Foreign Exchange Speculation: An Event Study," IJFS, MDPI, vol. 6(1), pages 1-13, February.

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    More about this item

    Keywords

    Bid-ask spreads; Microstructure costs; Exchange rate;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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