The Components of Electronic Inter‐Dealer Spot FX Bid‐Ask Spreads

Frank McGroarty, Owain ap Gwilym and Stephen Thomas

Journal of Business Finance & Accounting, 2007, vol. 34, issue 9‐10, 1635-1650

Abstract: Abstract: This paper applies an established bid‐ask spread decomposition model to the inter‐dealer spot foreign exchange market. In addition, the paper presents and tests a modified decomposition model which is specifically adapted to the features of order‐driven markets and which is found to produce more plausible results than the original model. Price clustering is introduced as a new explanatory factor within this framework and is shown to be vitally important in understanding the composition of bid‐ask spreads in this market.

Date: 2007
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https://doi.org/10.1111/j.1468-5957.2007.02051.x

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