Transmission of Volatility and Trading Activity in the Global Interdealer Foreign Exchange Market: Evidence from Electronic Broking Services (Ebs) Data

39 Pages Posted: 27 Jun 2006

See all articles by Fang Cai

Fang Cai

Federal Reserve Board

Jon Wongswan

Phatra Securities

Edward Howorka

EBS Group Limited

Date Written: June 2006

Abstract

This paper studies the transmission of volatility and trading activity in the foreign exchange market across trading regions for the euro-dollar and dollar-yen currency pairs, using high-frequency intraday data from Electronic Broking Services (EBS). In contrast with previous studies that use indicative quote frequency to proxy for trading activity, we use actual regional trading volume to identify five distinct trading regions in the foreign exchange market: Asia Pacific, the Asia-Europe overlap, Europe, the Europe-America overlap, and America. Based on realized volatility computed from high-frequency data and a regional volatility model, we find statistically significant evidence for volatility spillovers at both the own-region and the inter-region levels, but the economic significance of own-region spillovers is much more important than that of inter-region spillovers. We also examine the transmission of trading activity (trading volume and number of transactions) across the five trading regions and find similar results to those for volatility, but the economic significance of own-region spillovers is even more dominant.

Keywords: Exchange rate, volatility, trading volume, high-frequency data

JEL Classification: F31, G15

Suggested Citation

Cai, Fang and Wongswan, Jon and Howorka, Edward, Transmission of Volatility and Trading Activity in the Global Interdealer Foreign Exchange Market: Evidence from Electronic Broking Services (Ebs) Data (June 2006). FEDS Working Paper No. 863, Available at SSRN: https://ssrn.com/abstract=911560 or http://dx.doi.org/10.2139/ssrn.911560

Fang Cai (Contact Author)

Federal Reserve Board ( email )

Office of Financial Stability Policy and Research
1801 K St NW
Washington, DC 20551
United States
202-452-3540 (Phone)
202-263-4850 (Fax)

Jon Wongswan

Phatra Securities ( email )

11F Muang Thai-Phatra Office Tower 1
252/6 Ratchadapisek Road
Bangkok, 10400
Thailand

Edward Howorka

EBS Group Limited ( email )

10 Paternoster Square
London EC4M 7DY
United Kingdom

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