How Important Is Informed Trading for the Bid-Ask Spread? Evidence from an Emerging Market
AbstractThe link between informed trading and the bid-ask spread has been the focus of abundant literature and some authors feared that a large amount of informed trading might lead to shutdown of markets. We explore this issue using data from the Czech Republic. Our estimates confirm that the share of informed trading and its variability is indeed high relative to developed markets, however, share of the adverse selection component is only 14% of the spread. Since the Czech Republic has been known in the financial community as being plagued by informed trading, our findings suggest that the relative importance of adverse selection as a determinant of the spread is generally low across markets.
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Bibliographic InfoPaper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp168.
Date of creation: Dec 2000
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market microstructure; informed trading; bid-ask spread; adverse selection;
Other versions of this item:
- Jan Hanousek & Richard Podpiera, 2001. "How Important Is Informed Trading for the Bid-Ask Spread? Evidence from an Emerging Market," Finance 0012003, EconWPA.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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