A Specialist'S Quoted Depth As A Strategic Choice Variable: An Application To Spread Decomposition Models
AbstractAlthough there is a sizable literature demonstrating that liquidity and transaction costs are multidimensional, researchers continue to estimate adverse-selection costs using only prices. We present a model of a profit-maximizing specialist who posts prices and depths. The model is simulated to measure changes in the adverse-selection component of the spread that result under different levels of informed trading. We find that spread decompositions fail to capture the full extent of adverse-selection risk when specialists choose depth. We recommend that researchers use adverse-selection measures that account for depth as well as spread to mitigate this problem. 2006 The Southern Finance Association and the Southwestern Finance Association.
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Bibliographic InfoArticle provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.
Volume (Year): 29 (2006)
Issue (Month): 3 ()
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- Buti, Sabrina, 2007. "A Challenger to the Limit Order Book: The NYSE Specialist," SIFR Research Report Series 55, Institute for Financial Research.
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