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Exchange Rate Risk and the Bid-Ask Spread: A Seven Country Comparison

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  • Boothe, Paul M

Abstract

This paper studies the determination of exchange market transaction costs. Using a large data set including seven currencies, it provide s empirical support for the theoretical prediction of a positive relationship between the level of uncertainty regarding future prices and current transaction costs. In contrast to most previous work, it considers explicitly the problem of omitted transactions volume, showing that while estimators are les s efficient and potentially inconsistent in the absence of the unavailable variable, the direction of potential coefficient bias is such that hypothesis tests regarding the importance of uncertainty are rendered more conservative. Copyright 1988 by Oxford University Press.

Suggested Citation

  • Boothe, Paul M, 1988. "Exchange Rate Risk and the Bid-Ask Spread: A Seven Country Comparison," Economic Inquiry, Western Economic Association International, vol. 26(3), pages 485-492, July.
  • Handle: RePEc:oup:ecinqu:v:26:y:1988:i:3:p:485-92
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    References listed on IDEAS

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    1. King, Robert G., 1981. "Monetary information and monetary neutrality," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 195-206.
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    Cited by:

    1. Jeffrey A. Frankel & Giampaolo Galli & Alberto Giovannini, 1996. "Introduction to "The Microstructure of Foreign Exchange Markets"," NBER Chapters,in: The Microstructure of Foreign Exchange Markets, pages 1-18 National Bureau of Economic Research, Inc.
    2. Shang-Jin Wei, 1991. "Anticipations of foreign exchange volatility and bid-ask spreads," International Finance Discussion Papers 409, Board of Governors of the Federal Reserve System (U.S.).
    3. Gianluca Marcato & Charles Ward, 2007. "Back from Beyond the Bid-Ask Spread: Estimating Liquidity in International Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(4), pages 599-622, December.
    4. C. Yiu & S. Wong & K. Chau, 2009. "Transaction Volume and Price Dispersion in the Presale and Spot Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 38(3), pages 241-253, April.
    5. Gianluca Marcato & Charles Ward, 2006. "Back from Beyond the Bid-Ask Spread: Perspectives on Liquidity," Real Estate & Planning Working Papers rep-wp2006-15, Henley Business School, Reading University.
    6. Khemraj, Tarron & Pasha, Sukrishnalall, 2008. "Foreign exchange market bid-ask spread and market power in an underdeveloped economy," MPRA Paper 11422, University Library of Munich, Germany.
    7. Hau, Harald & Killeen, William & Moore, Michael, 2002. "The euro as an international currency: explaining puzzling first evidence from the foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 21(3), pages 351-383, June.
    8. Detken, Carsten & Hartmann, Philipp, 2000. "The Euro and International Capital Markets," International Finance, Wiley Blackwell, vol. 3(1), pages 53-94, April.
    9. Aliber, Robert Z. & Chowdhry, Bhagwan & Yan, Shu, 2000. "Transactions Costs in the Foreign Exchange Market," University of California at Los Angeles, Anderson Graduate School of Management qt4qw3p6rp, Anderson Graduate School of Management, UCLA.
    10. Hartmann, Philipp, 1998. "Do Reuters spreads reflect currencies' differences in global trading activity?," Journal of International Money and Finance, Elsevier, vol. 17(5), pages 757-784, October.
    11. Bollerslev, Tim & Domowitz, Ian & Wang, Jianxin, 1997. "Order flow and the bid-ask spread: An empirical probability model of screen-based trading," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1471-1491, June.
    12. Coelho dos Santos, Marcelo Bittencourt & Klotzle, Marcelo Cabus & Figueiredo Pinto, Antonio Carlos, 2016. "Evidence of risk premiums in emerging market carry trade currencies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 103-115.
    13. Torbjorn I. Becker & Amadou N Sy, 2005. "Were Bid-Ask Spreads in the Foreign Exchange Market Excessive During the Asian Crisis?," IMF Working Papers 05/34, International Monetary Fund.
    14. Alex Frino & Elvis Jarnecic & Hui Zheng, 2010. "Activity in futures: does underlying market size relate to futures trading volume?," Review of Quantitative Finance and Accounting, Springer, vol. 34(3), pages 313-325, April.
    15. Ali Kutan & Su Zhou, 1995. "Sociopolitical instability, volatility, and the bid-ask spread: Evidence from the free market for dollars in Poland," Open Economies Review, Springer, vol. 6(3), pages 225-236, July.
    16. Hua, Mingshu, 2009. "A study on foreign exchange dealers' bid-ask spread quote behavior," Pacific-Basin Finance Journal, Elsevier, vol. 17(4), pages 506-523, September.

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