The foreign exchange futures market: Estimation, patterns, behavior, and determinants of implied bid-ask spreads.

摘要

This research analyzes the bid-ask bounce behavior of Deutschemark (DM) and Japanese yen (JY) futures prices. Using a second-order Markov chain transition matrix model, the study derives a generalized estimator of bid-ask spreads (BAS) in the foreign exchange futures (FXF) market and analyzes the intraday behavior of the spreads. The identified Markov transition matrix is found to lead to a desirable equilibrium condition of equal chances for reaching a bid or an ask transaction type.;Under the three-period model used to compute the covariance of price changes, the BAS estimator incorporates the conditional probability of a subsequent transaction being the same type as that of the current transaction's and the conditional probability of the next transaction being the same as the current type but different from the previous type. It is found that BASs in the FXF market are higher at the beginning and end of the trading day than the rest of the day, reflecting more uncertainty due to information flows and overnight inventory carrying costs, respectively.;The study examines the determinants of BASs in the FXF market. It is found that the activity level, risk, and the U.S.-foreign interest rate differential are major determinants of BASs. The negative relationship between BASs and price levels suggest that there are economies of scale in the trading of FXF contracts.;Using the daily closing, opening, and noon prices, the study tests for interday efficiency in the FXF market by investigating whether or not the two FXF follow a random walk process. The variance ratio tests, in conjunction with the multiple variance ratio test, are applied to the data. It is found that both the DM and JY futures' interday prices are serially uncorrelated. Additionally, the conclusions from the Singapore International Monetary Exchange for the same contracts concur with these findings. The random walk behavior of FXF prices sheds light on the fundamental differences between the FXF and commodity markets, as well as the differences between the FXF market and organized equity markets. Furthermore, the tests suggest that the FXF market is a 24-hour global market.