TY  - JOUR
AU  - Wei,Shang-Jin
TI  - Anticipations of Foreign Exchange Volatility and Bid-Ask Spreads
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4737
PY  - 1994
Y2  - May 1994
UR  - http://www.nber.org/papers/w4737
L1  - http://www.nber.org/papers/w4737.pdf
N1  - Author contact info:
Shang-Jin Wei
Graduate School of Business
Columbia University
Uris Hall 619
3022 Broadway
New York, NY 10027-6902
Tel: 212/854-9139
E-Mail: shangjin.wei@columbia.edu
AB  - The paper studies the effect of the market's perceived exchange rate volatility on bid-ask spreads.  The anticipated volatility is extracted from currency options data.  An increase in the perceived volatility is found to widen bid-ask spreads.  The direction of the effect is consistent with an option model of the spread, but the magnitude is smaller.  An increase in trading volume of spot exchange rates also widens the spread.  The omission of the trading volume, however, does not bias the estimate of the effect of the volatility on the spreads.  Although the spread-volatility relation implied by the option model of the spread is close to linear, some form of nonlinearity can still be detected from the data.
ER  -