Realized volatility of the spread: analysis in the foreign exchange market

Emawtee Bissoondoyal-Bheenick, Robert Darren Brooks, Sirimon Treepongkaruna, Marvin Wee

Research output: Chapter in Book/Report/Conference proceedingChapter (Book)Researchpeer-review

Abstract

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.
Original languageEnglish
Title of host publicationRisk Management in Emerging Markets
Subtitle of host publicationIssues, Framework, and Modeling
EditorsSabri Boubaker, Bonnie Buchannan, Duc Khong Ngyuyen
Place of PublicationBingley UK
PublisherEmerald Group Publishing Limited
Pages3-35
Number of pages33
ISBN (Electronic)9781786354518
ISBN (Print)9781786354525
DOIs
Publication statusPublished - 2016

Keywords

  • Foreign exchange market
  • liquidity
  • realized volatility
  • realized skewness
  • bid-ask spreads
  • financial crisis

Cite this

Bissoondoyal-Bheenick, E., Brooks, R. D., Treepongkaruna, S., & Wee, M. (2016). Realized volatility of the spread: analysis in the foreign exchange market. In S. Boubaker, B. Buchannan, & D. K. Ngyuyen (Eds.), Risk Management in Emerging Markets: Issues, Framework, and Modeling (pp. 3-35). Bingley UK: Emerald Group Publishing Limited. https://doi.org/10.1108/978-1-78635-452-520161001
Bissoondoyal-Bheenick, Emawtee ; Brooks, Robert Darren ; Treepongkaruna, Sirimon ; Wee, Marvin. / Realized volatility of the spread: analysis in the foreign exchange market. Risk Management in Emerging Markets: Issues, Framework, and Modeling. editor / Sabri Boubaker ; Bonnie Buchannan ; Duc Khong Ngyuyen. Bingley UK : Emerald Group Publishing Limited, 2016. pp. 3-35
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Bissoondoyal-Bheenick, E, Brooks, RD, Treepongkaruna, S & Wee, M 2016, Realized volatility of the spread: analysis in the foreign exchange market. in S Boubaker, B Buchannan & DK Ngyuyen (eds), Risk Management in Emerging Markets: Issues, Framework, and Modeling. Emerald Group Publishing Limited, Bingley UK, pp. 3-35. https://doi.org/10.1108/978-1-78635-452-520161001

Realized volatility of the spread: analysis in the foreign exchange market. / Bissoondoyal-Bheenick, Emawtee; Brooks, Robert Darren; Treepongkaruna, Sirimon; Wee, Marvin.

Risk Management in Emerging Markets: Issues, Framework, and Modeling. ed. / Sabri Boubaker; Bonnie Buchannan; Duc Khong Ngyuyen. Bingley UK : Emerald Group Publishing Limited, 2016. p. 3-35.

Research output: Chapter in Book/Report/Conference proceedingChapter (Book)Researchpeer-review

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AB - 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.

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BT - Risk Management in Emerging Markets

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PB - Emerald Group Publishing Limited

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ER -

Bissoondoyal-Bheenick E, Brooks RD, Treepongkaruna S, Wee M. Realized volatility of the spread: analysis in the foreign exchange market. In Boubaker S, Buchannan B, Ngyuyen DK, editors, Risk Management in Emerging Markets: Issues, Framework, and Modeling. Bingley UK: Emerald Group Publishing Limited. 2016. p. 3-35 https://doi.org/10.1108/978-1-78635-452-520161001