Microstructure of Foreign Exchange Market in Croatia

Tomislav Galac (), Ante Burić and Ivan Huljak ()
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Tomislav Galac: The Croatian National Bank, Croatia
Ivan Huljak: The Croatian National Bank, Croatia

No 15, Working Papers from The Croatian National Bank, Croatia

Abstract: This paper presents the results of the first analysis of the Croatian FX market microstructure. It focuses on the investigation of correlations between trading volume, exchange rate volatility and bid-ask spreads in the market for the Croatian domestic currency – the kuna. The analysis suggests that there is a positive correlation between unexpected volume and unexpected volatility in the kuna spot market as well as a negative correlation between expected volume and unexpected volatility, both as predicted by theory. In the context of recent events in Croatia, it seems very likely that both results are an expected consequence of the flow of macroeconomic and political indicators related to the speed of Croatia’s EU accession. The analysis also suggests a weak positive correlation between expected volatility and the spread in the kuna spot market and a strong negative correlation between the spread and the expected trading volume. In the case of expected trading volume, this finding supports the economies of scale explanation of spread reduction due to an increase in market liquidity, while the positive correlation between the spread and the expected volatility supports the inventory-cost explanation of bid-ask spread determination. Both results have direct consequences for the central bank policymaking since the central bank is almost the sole regulator of the Croatian foreign exchange market.

Keywords: exchange rate; foreign exchange market; market microstructure; Croatia (search for similar items in EconPapers)
JEL-codes: F31 L23 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2006-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hnb:wpaper:15

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