Journal Article

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

Charles Goodhart, Ryan Love, Richard Payne and Dagfinn Rime

in Economic Policy

Published on behalf of Center for Economic Studies of the University of Munich

Volume 17, issue 35, pages 535-552
Published in print October 2002 | ISSN: 0266-4658
Published online July 2014 | e-ISSN: 1468-0327 | DOI: https://dx.doi.org/10.1111/1468-0327.00096
Analysis of spreads in the dollar/euro and deutschemark/dollar foreign exchange markets

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Forex markets and the euro

Dollar spreads: mark versus euro

We 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

Journal Article.  6711 words.  Illustrated.

Subjects: Economic Growth and Aggregate Productivity ; Financial Regulation ; Health, Education, and Welfare ; Labour and Demographic Economics ; Macroeconomics and Monetary Economics ; Public Economics ; Regional Government Analysis

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