Spread Components in the Hungarian Forint-Euro Market

Michael Frömmel and Frederick Van Gysegem

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We apply the spread decomposition model by Huang and Stoll (1997) to a new dataset on the Hungarian Forint/Euro interbank market. In contrast to previous results we cover a minor market over a long time span. We find a significant inventory effect, which can be explained by the low number of trades per day and thus the long time between offsetting trades. The trading volume increased gradually during our sample period and coincided with a decreasing spread. We find that spread size increases significantly with trade size, in contrast to previous research on the customer market. We show that this increase is caused by rising inventory holding and adverse selection costs. Overall this work confirms the predictions from various theoretical models on a small and less liquid market. When comparing with other results the size of the market, institutional differences between markets and specificities of a dataset seem to play an important role.

Keywords: microstructure; foreign exchange; spread; Hungary; inventory; adverse selection (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011-02
New Economics Papers: this item is included in nep-ifn and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://wps-feb.ugent.be/Papers/wp_11_709.pdf (application/pdf)

Related works:
Journal Article: Spread Components in the Hungarian Forint-Euro Market (2012)
Working Paper: Spread Components in the Hungarian Forint-Euro Market (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:11/709

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