Faculty Publication by Carol Osler

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Faculty Member:

Carol Osler

Title of Publication:

"Asymmetric Information and Currency Spreads"

Publication Type:

Working Paper

Year of Publication:

2005

Co-Authors:

Alexander Mende, Lukas Menkhoff, Carol L. Osler

Abstract:

This paper provides evidence that currency spreads do not fit the standard paradigm in the literature, which highlights three determinants: operating costs, inventory risk, and adverse selection. We show that, contrary to the predictions of the paradigm, currency spreads are inversely related to deal size and are narrowest for the counterparties dealers consider most informed. We suggest that asymmetric information may generate this pattern through two channels. First, it may strengthen dealers' market power relative to the least informed customers. Second, it may lead dealers to strategically narrow spreads to informed customers to learn their private information.

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