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EXCHANGE RATE RISK and THE BID‐ASK SPREAD: A SEVEN COUNTRY COMPARISON
Author(s) -
Boothe Paul
Publication year - 1988
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1988.tb01510.x
Subject(s) - economics , econometrics , transaction cost , estimator , omitted variable bias , database transaction , contrast (vision) , exchange rate , variable (mathematics) , ask price , financial economics , microeconomics , monetary economics , statistics , mathematics , computer science , finance , mathematical analysis , artificial intelligence , programming language
This paper studies the determination of exchange market transaction costs. Using a large data set including seven currencies, it provides empirical support for the theoretical prediction of a positive relationship between the level of uncertainty regarding future prices and current transaction costs. In contrast to most previous work, it considers explicitly the problem of omitted transactions volume, showing that while estimators are less efficient and potentially inconsistent in the absence of the unavailable variable, the direction of potential coefficient bias is such that hypothesis tests regarding the importance of uncertainty are rendered more conservative.