Microstructure effects, bid-ask spreads and volatility in the spot foreign exchange market pre and post-EMU

This article examines how microstructure effects, evident in high frequency data, influence bid-ask spreads and volatility in transaction price series. It uses the event of European Monetary Union (EMU), and the upheaval that this entailed, as an opportunity to empiricallyinvestigate these relationships in the electronic inter-dealer spot FX market. These microstructure effects relate to both price and time. There are two price effects: 1) price discreteness and 2) price clustering, and two time effects: 1) the time elapsed between sampleperiods and 2) the time-gap between successive trades or quoted price submissions. Strong evidence emerges that all four factors are important in the determination of bid-ask spreads