Realized Volatility of the Spread: Analysis in the Foreign Exchange Market

Bissoondoyal-Bheenick, E, Brooks, R, Treepongkaruna, S and Wee, M 2016, 'Realized Volatility of the Spread: Analysis in the Foreign Exchange Market' in Sabri Boubaker, Bonnie Buchanan, Duc Khuong Nguyen (ed.) Risk Management in Emerging Markets, Emerald Group Publishing Limited, United Kingdom, pp. 3-35.


Document type: Book Chapter
Collection: Book Chapters

Title Realized Volatility of the Spread: Analysis in the Foreign Exchange Market
Author(s) Bissoondoyal-Bheenick, E
Brooks, R
Treepongkaruna, S
Wee, M
Year 2016
Title of book Risk Management in Emerging Markets
Publisher Emerald Group Publishing Limited
Place of publication United Kingdom
Editor(s) Sabri Boubaker, Bonnie Buchanan, Duc Khuong Nguyen
Start page 3
End page 35
Subjects Finance
Summary This chapter investigates the determinants of the volatility of spread in the over-the-counter foreign exchange market and examines whether the relationships differ in the crisis periods. We compute the measures for the volatility of liquidity by using bid-ask spread data sampled at a high frequency of five minutes. By examining 11 currencies over a 13-year sample period, we utilize a balanced dynamic panel regression to investigate whether the risk associated with the currencies quoted or trading activity affects the variability of liquidity provision in the FX market and examine whether the crisis periods have any effect. We find that both the level of spread and volatility of spread increases during the crisis periods for the currencies of emerging countries. In addition, we find increases in risks associated with the currencies proxied by realized volatility during the crisis periods. We also show risks associated with the currency are the major determinants of the variability of liquidity and that these relationships strengthen during periods of uncertainty. First, we develop measures to capture the variability of liquidity. Our measures to capture the variability of liquidity are non-parametric and model-free variable. Second, we contribute to the debate of whether variability of liquidity is adverse to market participants by examining what drives the variability of liquidity. Finally, we analyze seven crisis periods, allowing us to document the effect of the crises on determinants of variability of liquidity over time.
Copyright notice Copyright © 2016 Emerald Group Publishing Limited
Keyword(s) Foreign exchange market
liquidity
realized volatility
realized skewness
bid-ask spreads
financial crisis
ISBN 9781786354525
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