Bid-ask spreads and volatility in the foreign exchange market. An empirical analysis
Abstract
Consistent with the implications from a simple asymmetric information model for the
bid-ask spread, we present empirical evidence that the size of the bid-ask spread
in the foreign exchange market is positively related to the underlying exchange rate
uncertainty. The estimation results are based on an ordered probit analysis that captures
the discreteness in the spread distribution, with the uncertainty of the spot exchange
rate being quantified through a GARCH type model. The data sets consists of more than
300,000 continuously recorded Deutschemark/dollar quotes over the period from April
1989 to June 1989. © 1994.
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Journal articlePermalink
https://hdl.handle.net/10161/1958Published Version (Please cite this version)
10.1016/0022-1996(94)90008-6Publication Info
Bollerslev, T; & Melvin, M (1994). Bid-ask spreads and volatility in the foreign exchange market. An empirical analysis.
Journal of International Economics, 36(3-4). pp. 355-372. 10.1016/0022-1996(94)90008-6. Retrieved from https://hdl.handle.net/10161/1958.This is constructed from limited available data and may be imprecise. To cite this
article, please review & use the official citation provided by the journal.
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Tim Bollerslev
Juanita and Clifton Kreps Distinguished Professor of Economics, in Trinity College
of Arts and Sciences
Professor Bollerslev conducts research in the areas of time-series econometrics, financial
econometrics, and empirical asset pricing finance. He is particularly well known
for his developments of econometric models and procedures for analyzing and forecasting
financial market volatility. Much of Bollerslev’s recent research has focused on
the analysis of newly available high-frequency intraday, or tick-by-tick, financial
data and so-called realized volatility measures, macroeconomic news annou

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