Essays in Honour of Charles Goodhart, Volume Two
Edited by Paul Mizen
Chapter 7: Trading activity, volatility and transactions costs in spot FX markets
Richard G. Payne* 1. INTRODUCTION In recent times, a fair amount of attention, from both academics and regulators, has been focussed on the links between the microstructures of securities markets and their ‘stability’. The question at the heart of this attention is whether microstructure factors can help explain the onset and persistence of market turbulence. After the event of a ‘market shock’, do the design of a trading system or the natural responses of liquidity suppliers and demanders in a market tend to exacerbate and/or prolong the shock’s eﬀects? Microstructure-level variables that are fundamental to investigations of this issue are liquidity and trading activity. Liquidity is an oft-discussed but rarely deﬁned concept. In what is to come, we will use the following deﬁnition: a liquid market is one in which an agent can immediately trade a reasonably large quantity with relatively small price impact. Trading activity can also be measured in several diﬀerent ways. More traditional measures of trading activity are simply counts of or aggregate volumes from recent transactions, regardless of whether trades were buyer or seller initiated. In what follows we employ one such measure – transaction frequency. However, a more relevant variable from a microstructure perspective, as emphasised in recent papers by Evans and Lyons (2002) and Chordia et al. (2001), is order ﬂow – the diﬀerence between the aggregate number/volume of buyer initiated and seller initiated trades in a particular interval. Order ﬂow is important as it indicates the balance of liquidity demand,...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.