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The Components of Electronic Inter-Dealer Spot FX Bid-Ask Spreads |
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| Authors: | Frank McGroarty Owain ap Gwilym Stephen Thomas |
| Affiliation: | The authors are respectively Lecturer in Finance, School of Management, University of Southampton;Professor of Finance, School of Management &Business, University of Wales, Aberystwyth;and Professor of Finance, Cass Business School, City University, London. |
| 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. |
| Keywords: | high frequency data foreign exchange market microstructure bid-ask spreads order driven |