Trading volumes, volatility and spreads in FX （在外汇交易量,波动性和利差）.pdf

Trading volumes, volatility and spreads in FX markets: evidence from emerging market countries Gabriele Galati, Bank for International Settlements Abstract This paper provides empirical evidence on the relationship between trading volumes, volatility and bid- ask spreads in foreign exchange markets. It uses a new data set that includes daily data on trading volumes for the dollar exchange rates of seven currencies from emerging market countries. The sample period is 1 January 1998 to 30 June 1999. The results are broadly consistent with the findings of the literature that used futures volumes as proxies for total foreign exchange trading. I find that in most cases unexpected trading volumes and volatility are positively correlated, suggesting that both are driven by the arrival of public information, as predicted by the mixture of distributions hypothesis. I also find evidence of a positive correlation between volatility and spreads, as suggested by inventory cost models. However, contrary to the prediction of these models, I do not find evidence of a significant impact of unexpected trading volumes on spreads. 1. Introduction This paper looks at the relationship between trading volumes, volatility and bid-ask spreads in foreign exchange markets. A number of studies on the microstructure of foreign exchange markets have looked at this issue from both a theoretical and an empirical point of view. From a policy perspective, the issue is important for its implications for the analysis of market liquidity and its relationship with risk. Broadly speaking, a market can be considered to be liquid when large transactions can be executed with a small impact on prices (BIS (1999a)). In practice, however, no data are available that allow to measure this defini