Abstract
This paper analyzes spot foreign exchange bid-ask spread and the future market sentiment as two important variables to explain the exchange rate returns. We use two sentiment indices based on futures market return and volume. Time series and cross-sectional analyses of three different currency exchange rates; Australian Dollar, British Pound and Canadian Dollar – to US Dollar suggest that the spot market bid-ask spread is one important variable that positively affects the spot exchange rate returns. The return based sentiment index does not seem to be a significant factor, but the volume based sentiment index affects the spot exchange rate returns significantly. The negative sign of sentiment indices implies lower spot market return associated with higher investor interest in futures market, although higher trading in futures market contributes positively in the spot market.
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Article Details
- Year: 2012
- Volume: 33
- Issue: 4
- Pages: 63 - 85
- Accepted: 08.10.2012
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DOI:
https://doi.org/10.5281/zenodo.20762890 -
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How to Cite?
M. Faisal Safa, Neal C. Maroney (2012). Bid-Ask Spread, Futures Market Sentiment and Exchange Rate Returns. Journal of Economic Cooperation and Development, 33(4), 63-85. https://doi.org/10.5281/zenodo.20762890
