by Antonis A. Demos and Charles A. E. Goodhart, a scientific article from the Applied Economics.
There is an empirical relationship between volatility, average spread, and number ofquotations in the foreign exchange spot market. The estimation procedure involvestwo steps. In the Þrst one the optimal functional form between these variables isdetermined through a maximization procedure of the unrestricted VAR, involving theBoxÐCox transformation. The second step uses the two-stage least squares method toestimate the transformed variables in a simultaneous equation system framework. Theresults indicate that the number of quotations successfully approximates activity inthe spot market. Furthermore, the number of quotations and temporal dummiesreduce signiÞcantly the conditional heteroskedasticity e¤ect. We also discuss informationaspects of the model as well as its implications for Þnancial informationaltheories. Inter- and intra-day patterns of the three variables are also revealed.
