Determinants of the Bid-Ask Spread On Forward Foreign Exchange Contracts Under Floating Exchange Rates

Cornell, W. Bradford

doi:10.1057/palgrave.jibs.8490659

Cited by 12 publications

(6 citation statements)

References 2 publications

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“…The upshot of this argument is that unanticipated volume, which monotonically reveals the level of informed trading, should be positively correlated with the bid-ask spread. According to Cornell (1978), anticipated volume should be negatively related to the bid-ask spread because of economies of scales, competition among market makers and inventory management opportunities.…”

Section: Theoretical Backgroundmentioning

confidence: 99%

Private Information, Excessive Volatility and Intraday Empirical Regularities in the Spot Foreign Exchange Market

2005

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Financial markets generally, and the spot foreign exchange market in particular, are reputed to be excessively volatile. Previous research has linked this excess volatility to private information. This article re-examines the theory and challenges that link. Empirical evidence suggests that random variation between buy and sell volumes is a more important driver than private information in the spot foreign exchange market. The paper also develops theoretical propositions for the relationships between key market variables on an intraday basis. High frequency data is used to examine the role of private information in explaining well documented intraday patterns that persist in the time series of a number of trade related variables, including return volatility. JEL Classification: F31; G12; G15; D4

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Section: Theoretical Backgroundmentioning

confidence: 99%

Private Information, Excessive Volatility and Intraday Empirical Regularities in the Spot Foreign Exchange Market

2005

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“…Trading activity is also measured by trading volume and many authors have documented the positive correlation of bid-ask spreads with volume. Cornell (1978) argues that spreads should be a decreasing function of expected volume because of economies of scale and competition among market makers. The theoretical model of Easley and O'Hara (1992) reaches a similar conclusion.…”

Section: Overview Of the Literaturementioning

confidence: 99%

Were bid–ask spreads in the FX market excessive during the Asian crisis?

Becker

2006

International Review of Financial Analysis

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“…Trading volumes can have a different impact on spreads depending on whether they are expected or unexpected. Expected trading volumes should be negatively correlated with spreads to the extent that they reflect economies of scale and are associated with higher competition among market makers (Cornell (1978)). By contrast, unexpected trading volumes should have a positive impact on spreads to the extent that they are associated with higher volatility through the mixture of distribution hypothesis.…”

Section: Literature Reviewmentioning

confidence: 99%

Market Liquidity: Proceedings of a Workshop Held at the BIS

Settlements

2001

SSRN Journal

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BondBond dealers Tradenet EUREX Foreign exchange FX brokers Reuters EBSActual markets do not conform to simple structures. Indeed, they typically involve more than one structure. What is important, therefore, is not the operation of any specific trading mechanism, but rather the rules by which trades occur. These rules dictate what can be traded, who can trade, when and how orders can be submitted, who may see or handle the order, and how orders are processed.The rules determine how market structures work, and thus how prices are formed.Since rules can affect the behaviour of prices, liquidity might also naturally depend on how a market is structured. Indeed, liquidity concerns may dictate the structure of the market. Drawing on the extensive body of research investigating the interaction between market structure and liquidity, the remainder of this paper focuses on two critical issues in the creation of liquidity: the impact of limit orders, and the effects of transparency.

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Determinants of the Bid-Ask Spread On Forward Foreign Exchange Contracts Under Floating Exchange Rates

Cited by 12 publications

References 2 publications

Private Information, Excessive Volatility and Intraday Empirical Regularities in the Spot Foreign Exchange Market

Private Information, Excessive Volatility and Intraday Empirical Regularities in the Spot Foreign Exchange Market

Were bid–ask spreads in the FX market excessive during the Asian crisis?

Market Liquidity: Proceedings of a Workshop Held at the BIS

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