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Spread Skewness on Quote-Driven Markets

Student: Vyacheslav Dolgov

Supervisor: Victoria V. Dobrynskaya

Faculty: Faculty of Economic Sciences

Educational Programme: Financial Markets and Financial Institutions (Master)

Year of Graduation: 2018

This paper investigates phenomena, associated with the skewness of bid-ask spreads quoted by market-makers, i.e. quoting buy and sell prices asymmetrically in relation to the last trade price. Theoretical part of this research derives models, explaining spreads’ skewness pertaining to the informational advantage of a market-maker over the rest of the market. Empirical part of this research focuses on the instruments of data quality control for this kind of analysis and determining the lag between the decision on quotes and their publication, delivers methods for studying informational content of spread skewness; it also answers a question on whether investigated market-makers’ quotes’ skewness contains additional information allowing to predict forex market behaviour, and other empirical studies on spread asymmetry. During the study of quotes asymmetry on Russian retail forex market, we find that skewness does not allow us to make systematically correct forecasts about future movements of the exchange rate. For investigated market-makers, potential sources of asymmetry are: inventory effect, and, to a lesser extent, effect of adverse selection.

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