TRADING PATTERNS AND PRICES IN THE INTERBANK FOREIGN-EXCHANGE MARKET

The behavior of quote arrivals and bid-ask spreads is examined for con tinuously recorded deutsche mark-dollar exchange rate data over time, across locations, and by market participants. A pattern in the intrada y spread and intensity of market activity over time is uncovered and r elated to theories of trading patterns. Models for the conditional mea n and variance of returns and bid-ask spreads indicate volatility clus tering at high frequencies. The proposition that trading intensity has an independent effect on returns volatility is rejected, but holds fo r spread volatility. Conditional returns volatility is increasing in t he size of the spread.