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The Determinants of Bid-Ask Spread in the Guyanese FX Market

Utilizing the method of generalized least squares (GLS), the paper investigates the factors which determine bid-ask spread in the foreign exchange (FX) market of Guyana. The econometric exercise is based on a rich dataset of trading volumes as well as the buying and selling exchange rates for each cambio (or trader) from January 2000 to December 2007. The main findings are: (i) a positive relationship between a measure of market power and spread; (ii) a positive relationship between hoarding of FX and spread; and (iii) a strong positive association between risk and spread. The key contribution of this paper to the literature is the evidence that traders have the ability to influence the BAS, and by extension the exchange rate.