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Components of the wholesale bid-ask spread and the structure of grain markets: the case of rice in India

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  • Jha, Raghbendra
  • Murthy, K. V. B.
  • Nagarajan, Hari K.
  • Seth, Ashok

Abstract

We investigate the market microstructure of the wholesale markets for rice in India. We propose a general method of splitting the wholesale bid-ask spread into its three constituent components: the order processing costs, the adverse information costs and the inventory holding costs. The bid-ask spread reflects the extent of information asymmetry and order imbalance in the market place. However, the dynamics of the bid-ask spread can only be understood in terms of the movement of its components; hence the importance of isolating these components. We use Zellner's seemingly unrelated regressions to split the bid-ask spread into the three components in the rice markets of 14 major centers in India. The results are then linked to the production and consumption patterns in the market areas covered by these centers. © 1999 Elsevier Science B.V. All rights reserved.
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Suggested Citation

  • Jha, Raghbendra & Murthy, K. V. B. & Nagarajan, Hari K. & Seth, Ashok, 1999. "Components of the wholesale bid-ask spread and the structure of grain markets: the case of rice in India," Agricultural Economics, Blackwell, vol. 21(2), pages 173-189, October.
  • Handle: RePEc:eee:agecon:v:21:y:1999:i:2:p:173-189
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    References listed on IDEAS

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    1. 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 1471-1488, September.
    2. Bailey, DeeVon & Brorsen, B. Wade, 1989. "Price Asymmetry In Spatial Fed Cattle Markets," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 0(Number 2), pages 1-7, December.
    3. 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 115-134, March.
    4. von Cramon-Taubadel, Stephan, 1998. "Estimating Asymmetric Price Transmission with the Error Correction Representation: An application to the German Pork Market," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 25(1), pages 1-18.
    5. George, Thomas J & Kaul, Gautam & Nimalendran, M, 1991. "Estimation of the Bid-Ask Spread and Its Components: A New Approach," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 623-656.
    6. Roll, Richard, 1984. " A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-1139, September.
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    Cited by:

    1. A Banerji & J.V. Meenakshi, 2010. "Competition and Collusion in Grain Markets: Basmati Auctions in North India," Working Papers id:2701, eSocialSciences.
    2. Raghbendra Jha & Hari K. Nagarajan, 2002. "Noisy Vertical Markets," ASARC Working Papers 2002-04, The Australian National University, Australia South Asia Research Centre.

    More about this item

    JEL classification:

    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy

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