Trading Patterns and Prices in the Interbank Foreign Exchange Market

Authors

  • TIM BOLLERSLEV,

  • IAN DOMOWITZ

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    • Bollerslev is from the Kellogg Graduate School of Management, Northwestern University, and Domowitz is from the Department of Economics, Northwestern University. The authors thank Steve Albert and Jianxin Wang for excellent research assistance, and the National Science Foundation for financial support under grants SES90–22807 and SES89–21952. René Stulz (the editor) and an anonymous referee provided numerous useful suggestions on an earlier version of the paper.

ABSTRACT

The behavior of quote arrivals and bid-ask spreads is examined for continuously recorded deutsche mark-dollar exchange rate data over time, across locations, and by market participants. A pattern in the intraday spread and intensity of market activity over time is uncovered and related to theories of trading patterns. Models for the conditional mean and variance of returns and bid-ask spreads indicate volatility clustering at high frequencies. The proposition that trading intensity has an independent effect on returns volatility is rejected, but holds for spread volatility. Conditional returns volatility is increasing in the size of the spread.

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