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Trading Volumes and Transaction Costs in the Foreign Market - Evidence from Daily Dollar-Yen Spot Data

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  • Philipp Hartmann

Abstract

A Generalized Method of Moments estimation of the determinants of dollar/yen bid-ask spreads is undertaken. In particular, a long time-series of daily spot foreign exchange trading volumes is used for the first time. In line with standard spread models and volume theories, it can be shown that unpredictable foreign exchange turnover (a measure of the rate of information arrival) increases spreads, while predictable turnover decreases them. both effects are strongly significant when employing sport turnover instead of proxies like forward turnover as in previous studies (Bessembinder, 1994). The results are also found to be robust when unpredictable Reuters quoting frequency is used as an instrument for unpredictable trading volumes to cope with their endogeneity. Spread estimations with plain (non-decomposed) volumes are rejected as misspecified. Finally, there is evidence for the conditional heteroscedasticity of unpredictable spot foreign exchange volumes.

Suggested Citation

  • Philipp Hartmann, 1996. "Trading Volumes and Transaction Costs in the Foreign Market - Evidence from Daily Dollar-Yen Spot Data," FMG Discussion Papers dp232, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp232
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    Cited by:

    1. A. Bénassy-Quéré & S. Larribeau & R. MacDonald, 1999. "Models of exchange rate expectations : heterogeneous evidence from Panel data," THEMA Working Papers 99-05, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    2. Hartmann, Philipp, 1998. "Do Reuters spreads reflect currencies' differences in global trading activity?," Journal of International Money and Finance, Elsevier, vol. 17(5), pages 757-784, October.

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