Bid-ask spread dynamics in foreign exchange markets

Patricia Chelley-Steeley and Nikos Tsorakidis

International Review of Financial Analysis, 2013, vol. 29, issue C, 119-131

Abstract: The aim of this paper is to examine the short term dynamics of foreign exchange rate spreads. Using a vector autoregressive model (VAR) we show that most of the variation in the spread comes from the long run dependencies between past and future spreads rather than being caused by changes in inventory, adverse selection, cost of carry or order processing costs. We apply the Integrated Cumulative Sum of Squares (ICSS) algorithm of Inclan and Tiao (1994) to discover how often spread volatility changes. We find that spread volatility shifts are relatively uncommon and shifts in one currency spread tend not to spillover to other currency spreads.

Keywords: Bid-ask spreads; Microstructure costs; Exchange rate (search for similar items in EconPapers)
JEL-codes: G15 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:29:y:2013:i:c:p:119-131

DOI: 10.1016/j.irfa.2013.02.003

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