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

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  • Frank McGroarty
  • Owain ap Gwilym
  • Stephen Thomas

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.

Suggested Citation

  • Frank McGroarty & Owain ap Gwilym & Stephen Thomas, 2007. "The Components of Electronic Inter‐Dealer Spot FX Bid‐Ask Spreads," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(9‐10), pages 1635-1650, November.
    • Handle: RePEc:bla:jbfnac:v:34:y:2007:i:9-10:p:1635-1650
    DOI: 10.1111/j.1468-5957.2007.02051.x
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    References listed on IDEAS

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    1. Dinçer Afat & Michael Frömmel, 2021. "A Panel Data Analysis of Uncovered Interest Parity and Time-Varying Risk Premium," Open Economies Review, Springer, vol. 32(3), pages 507-526, July.

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