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

Hartmann, Philipp (1997) Do Reuters spreads reflect currencies' differences in global trading activity? Financial Markets Group Discussion Papers (265). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 1997 The Author(s)
Divisions: Financial Markets Group
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: F - International Economics > F3 - International Finance > F31 - Foreign Exchange
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C33 - Models with Panel Data
Date Deposited: 22 May 2023 15:54
Last Modified: 16 May 2024 12:30

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