AN EXPLANATION OF NON-EQUILIBRIUM CURRENCY BID-ASK SPREADS

Kofi B. Afful ()
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Kofi B. Afful: Benefit Advisory Research Pty Ltd, First Floor, North Block, Sanlam Park, 9 Fredman Drive, Sandton, Johannesburg, South Africa

International Journal of Theoretical and Applied Finance (IJTAF), 2004, vol. 07, issue 05, 531-540

Abstract: This paper proposes a theoretical model which is used to illustrate that transactions costs and a risk premium are not sufficient to explain the excess currency bid-ask spread. It illustrates that only in market structures that engender market power can foreign exchange dealers widen their currency bid-ask spread to exploit adverse economic forces and also exploit a relatively price inelastic demand for foreign exchange to charge higher-than-market-determined risk premiums thus charging an excess currency bid-ask spread.

Keywords: Currency spreads; imperfectly competitive currency markets; asset pricing (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1142/S0219024904002542

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