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Analysis of spreads in the dollar/euro and deutschemark/dollar foreign exchange markets

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  • Charles Goodhart
  • Ryan Love
  • Richard Payne
  • Dagfinn Rime

Abstract

Forex markets and the euroDollar spreads: mark versus euroWe compute bid-ask spreads for the dollar/euro exchange rate market and find them to be substantially larger than their deutschemark counterparts before introduction of the euro. We show that larger percentage spreads are not explained by volatility, trade intensity, and other standard explanatory variables in our data sets. But we also show that spreads have not increased in terms of the unit (‘pip’) used in exchange rate quotations to the fourth decimal point. Since the euro is worth about two marks, and was initially worth more than a dollar, this finding suggests that larger percentage spreads reflect the more pronounced ‘granularity’ of quoting conventions in euro-dollar rather than dollar-mark trading. We discuss whether mandating quotations to the fifth decimal point might be advisable, and conclude that such a policy might, but need not, increase the foreign exchange market's liquidity.– Charles Goodhart, Ryan Love, Richard Payne and Dagfinn Rime

Suggested Citation

  • Charles Goodhart & Ryan Love & Richard Payne & Dagfinn Rime, 2002. "Analysis of spreads in the dollar/euro and deutschemark/dollar foreign exchange markets," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 17(35), pages 535-552.
    • Handle: RePEc:oup:ecpoli:v:17:y:2002:i:35:p:535-552.
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    File URL: http://hdl.handle.net/10.1111/1468-0327.00096
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    Cited by:

    1. Gabriele Galati & Kostas Tsatsaronis, 2003. "The impact of the euro on Europe's financial markets," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 12(3), pages 165-222, August.
    2. Bjonnes, Geir Hoidal & Rime, Dagfinn, 2005. "Dealer behavior and trading systems in foreign exchange markets," Journal of Financial Economics, Elsevier, vol. 75(3), pages 571-605, March.
    3. Osler, Carol L. & Mende, Alexander & Menkhoff, Lukas, 2011. "Price discovery in currency markets," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1696-1718.
    4. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    5. Ding, Liang & Hiltrop, Jonas, 2010. "The electronic trading systems and bid-ask spreads in the foreign exchange market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 323-345, October.
    6. Michael R. King & Carol Osler & Dagfinn Rime, 2011. "Foreign exchange market structure, players and evolution," Working Paper 2011/10, Norges Bank.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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