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Determinants of the components of bid-ask spreads on stocks

Listed author(s):
  • Sung-Hun Kim
  • Joseph P. Ogden
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    In this paper we show that George et al. (GKN, 1991) estimators of the adverse selection and order processing cost components of the bid-ask spread are biased due to intertemporal variations in the bid-ask spread. We use alternative estimators that correct this bias and that are applicable to individual securities, and estimate these cost components empirically using data on NYSE/AMEX stocks. As expected, our results indicate that on average adverse selection costs account for approximately 50% of the bid-ask spread, sharply higher than the estimates of 8-10% obtained by GKN for NASDAQ stocks and 21% that we obtain for NYSE/AMEX stocks using GKN's estimators. We then conduct cross-sectional regressions designed primarily to determine whether adverse selection costs vary across specialists after controlling for firm size and other factors. Consistent with previously established hypotheses, we find that adverse-selection costs vary across specialists, and that this variation is related to the number of securities that the specialist handles. Copyright Blackwell Publishers Ltd. 1996.

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    Article provided by European Financial Management Association in its journal European Financial Management.

    Volume (Year): 2 (1996)
    Issue (Month): 1 ()
    Pages: 127-145

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    Handle: RePEc:bla:eufman:v:2:y:1996:i:1:p:127-145
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