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Do Reuters spreads reflect currencies' differences in global trading activity?

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  • Hartmann, Philipp

Abstract

A new estimate of the long-run impact of trading activity on bid-ask spreads in the foreign exchange markets is realized with a short panel containing around-the-clock Reuters quotes and global transaction volumes. Individual and time effects are accounted for in an unbalanced random effects model. In accordance with liquidity effect explanations the volume parameter is found to have a negative sign, although not at a high level of significance. The volatility parameter is positive and strongly significant. While the structural parameters of the model appear to be stable over time, the residuals are groupwise heteroscedastic. The higher standard error in 1992 might reflect the dynamic developments in the world forex market since 1989. Reuters quoting (tick) frequency is also tested as a measure of trading activity in spread estimations. The results turn out to be very similar to those with trading volumes, in particular when an instrumental variable estimator is employed to account for measurement errors or possible endogeneity problems.

Suggested Citation

  • Hartmann, Philipp, 1997. "Do Reuters spreads reflect currencies' differences in global trading activity?," LSE Research Online Documents on Economics 119148, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119148
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    File URL: http://eprints.lse.ac.uk/119148/
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    References listed on IDEAS

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    More about this item

    Keywords

    foreign exchange markets; bid-ask spreads; trading volumes; panel data; random effects models;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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