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

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

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 19 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.