DO REUTERS SPREADS REFLECT CURRENCIES DIFFERENCES IN GLOBAL TRADING ACTIVITY

A new estimation of the long-run impact of trading activity on bid-ask spreads in the foreign exchange markets is undertaken with a short pa nel containing around-the-clock Reuters quotes and global transaction volumes. Individual and time effects are accounted for in an unbalance d random effects model. In line with liquidity effect explanations the volume parameter is found to have a (weakly) significant negative sig n, whereas the volatility parameter is positive. Structural parameters are stable over time, while residuals are groupwise heteroscedastic. Reuters quoting ('tick') frequency is also tested as a measure of trad ing activity with very similar results.) (C) 1998 Elsevier Science Ltd . All rights reserved. JEL classifications: F31, G15, C33.