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How Important Is Informed Trading for the Bid-Ask Spread? Evidence from an Emerging Market

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Author Info
Jan Hanousek (CERGE-EI)
Richard Podpiera (CERGE-EI)

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Abstract

The 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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File URL: http://129.3.20.41/eps/fin/papers/0012/0012003.pdf
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Publisher Info
Paper provided by EconWPA in its series Finance with number 0012003.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 36 pages
Date of creation: 05 Feb 2001
Date of revision:
Handle: RePEc:wpa:wuwpfi:0012003

Note: Type of Document - Acrobat PDF; pages: 36 ; figures: included
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Web page: http://129.3.20.41

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Related research
Keywords: market microstructure; informed trading; bid-ask spread; adverse selection;

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Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. George, Thomas J & Kaul, Gautam & Nimalendran, M, 1991. "Estimation of the Bid-Ask Spread and Its Components: A New Approach," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 4(4), pages 623-56. [Downloadable!] (restricted)
  2. Affleck-Graves, John & Hegde, Shantaram P & Miller, Robert E, 1994. " Trading Mechanisms and the Components of the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 49(4), pages 1471-88, September. [Downloadable!] (restricted)
  3. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  4. Thomas Ho & Hans Stoll, . "On Dealer Markets Under Competition," Rodney L. White Center for Financial Research Working Papers 1-80, Wharton School Rodney L. White Center for Financial Research.
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  5. Peter C. Reiss & Ingrid M. Werner, 1998. "Does Risk Sharing Motivate Interdealer Trading?," Journal of Finance, American Finance Association, vol. 53(5), pages 1657-1703, October. [Downloadable!] (restricted)
  6. Huang, Roger D & Stoll, Hans R, 1997. "The Components of the Bid-Ask Spread: A General Approach," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(4), pages 995-1034.
  7. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1997. "One Day in the Life of a Very Common Stock," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(3), pages 805-35.
  8. Ho, Thomas S Y & Stoll, Hans R, 1983. " The Dynamics of Dealer Markets under Competition," Journal of Finance, American Finance Association, vol. 38(4), pages 1053-74, September. [Downloadable!] (restricted)
  9. Stoll, Hans R, 1989. " Inferring the Components of the Bid-Ask Spread: Theory and Empirical Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 115-34, March. [Downloadable!] (restricted)
  10. Easley, D. & Kiefer, N.M. & O'Hara, M., 1995. "Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow," Economics Working Papers 1995-5, School of Economics and Management, University of Aarhus.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Randall K. Filer & Jan Hanousek, 2001. "Data Watch: Research Data from Transition Economies," William Davidson Institute Working Papers Series 416, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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