Abstract
This study provides evidence on quotations and bid-ask spreads in the wholesale foreign exchange market, and introduces a method to document variation in the placement of quotes relative to asset value. I find that spreads widen with proxies for inventory-carrying costs, including forecasts of price risk and a measure of liquidity costs. Increases in spreads before nontrading periods can also be attributed to inventory costs. The location of currency quotes in relation to value is not constant, and the outcome of hypothesis tests regarding changes in currency value can be sensitive to allowances for variation in quote location.
Original language | English (US) |
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Pages (from-to) | 317-348 |
Number of pages | 32 |
Journal | Journal of Financial Economics |
Volume | 35 |
Issue number | 3 |
DOIs | |
State | Published - Jun 1994 |
Keywords
- Bid-ask spreads
- Currency markets
- Inventory control
- Inventory costs
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management