Khemraj, Tarron and Pasha, Sukrishnalall (2008): Foreign exchange market bid-ask spread and market power in an underdeveloped economy.
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This paper explores the influence of trader (or cambio) market power in determining the foreign exchange market bid-ask spread. In particular, it presents a theoretical model that incorporates the notion of oligopolistic power into the foreign exchange market. The econometric analysis substantiates the existence of oligopolistic trader market power in determining the spread. Moreover, the results confirm the prediction of standard market microstructure theory that volatility exerts a positive effect on spread. We also uncovered a positive relationship between liquidity (the quantity of foreign exchange traded) and spread, a result which differs from the existing literature. We interpret this finding to mean that oligopolistic traders set the mark-up exchange rate above where the purely competitive rate would have been so as to generate a surplus of US$ that is then hoarded. The econometric exercise utilizes a unique data set of trading volumes and buying/selling exchange rates for each cambio from January 2000 to December 2007.
|Item Type:||MPRA Paper|
|Original Title:||Foreign exchange market bid-ask spread and market power in an underdeveloped economy|
|Keywords:||bid-ask spread, foreign exchange market, GLS|
|Subjects:||O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development
F - International Economics > F0 - General > F00 - General
N - Economic History > N1 - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations > N16 - Latin America; Caribbean
D - Microeconomics > D4 - Market Structure and Pricing > D43 - Oligopoly and Other Forms of Market Imperfection
|Depositing User:||Tarron Khemraj|
|Date Deposited:||08. Nov 2008 15:10|
|Last Modified:||12. Feb 2013 20:46|
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