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Decomposing the Bid-ask Spread in Multi-Dealer Markets

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journal contribution
posted on 07.09.2018, 14:18 by Michael Bleaney, Zhiyong Li
In this paper, we modify the Huang and Stoll spread‐decomposing model to fit multi‐dealer markets. In a multi‐dealer market, individual dealers can rebalance their inventories either by trading with other dealers or by changing the quote price. Our modified model captures this feature. Using transaction data from the Reuters D2000‐1 system, we find that the order‐processing and inventory control components of the spread in the foreign exchange market are relatively small and dealers may tolerate the unwanted inventory to keep the spread small to attract informed orders. The asymmetric information component carries the biggest weight. We study the time pattern of the spread and its components. The spread varies significantly with the time of day, but the inventory control and asymmetric information components do not.

History

Citation

International Journal of Finance and Economics, 2016, 21 (1), pp. 75-89 (15)

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/School of Business

Version

AM (Accepted Manuscript)

Published in

International Journal of Finance and Economics

Publisher

Wiley

issn

1076-9307

eissn

1099-1158

Copyright date

2015

Available date

07/09/2018

Publisher version

https://onlinelibrary.wiley.com/doi/abs/10.1002/ijfe.1533

Language

en