Trading volumes and transaction costs in the foreign market - evidence from daily dollar-yen spot data

Hartmann, Philipp (1996) Trading volumes and transaction costs in the foreign market - evidence from daily dollar-yen spot data. Financial Markets Group Discussion Papers (232). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

A Generalized Method of Moments estimation of the determinants of dollar/yen bid-ask spreads is undertaken. In particular, a long time-series of daily spot foreign exchange trading volumes is used for the first time. In line with standard spread models and volume theories, it can be shown that unpredictable foreign exchange turnover (a measure of the rate of information arrival) increases spreads, while predictable turnover decreases them. Both effects are strongly significant when employing spot turnover instead of proxies like forward turnover as in previous studies (Bessembinder, 1994). The results are also found to be robust when unpredictable Reuters quoting frequency is used as an instrument for unpredictable trading volumes to cope with their endogeneity. Spread estimations with plain (non-decomposed) volumes are rejected as misspecified. Finally, there is evidence for the conditional heteroscedasticity of unpredictable spot foreign exchange volumes.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 1996 The Author
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 > C32 - Time-Series Models
Date Deposited:	05 Jun 2023 14:36
Last Modified:	16 Sep 2023 00:03
URI:	http://eprints.lse.ac.uk/id/eprint/119171

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