IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpfi/0509007.html
   My bibliography  Save this paper

A Dynamic Analysis of Bid-Ask Spreads with Multiple Trade Sizes

Author

Listed:
  • Shino Takayama

    (The University of Sydney)

  • Han Ozsoylev

    (University of Oxford)

Abstract

This paper studies how the trade size and the historical sequence of trades affect bid-ask spreads, investors’ trading strategies, and the market maker’s learning process in a multi-period economy. First, we show that there is a nonzero cut-off size below which informed traders never buy or sell, and that larger trade sizes have positive bid-ask spreads, while smaller sizes do not. Then, we prove that the cut-off size decreases stochastically . We also derive the functional relationship between bid-ask spreads and trade sizes and show that bid- ask spreads are monotonically increasing in trade sizes. Moreover, we prove that when additional trade sizes are introduced to the market, the market maker’s learning process can be impaired and the bid-ask spreads for the previously existing trade sizes can vanish under a mild condition. We prove that the smaller trade sizes that do not have a positive bid-ask spread result in zero price change, while for larger trade sizes the rate at which price change increases is a decreasing function of the trade size in all trading periods. Most of our results are broadly consistent with the empirical findings.

Suggested Citation

  • Shino Takayama & Han Ozsoylev, 2005. "A Dynamic Analysis of Bid-Ask Spreads with Multiple Trade Sizes," Finance 0509007, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0509007
    Note: Type of Document - pdf; pages: 54
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0509/0509007.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    2. Hasbrouck, Joel, 1988. "Trades, quotes, inventories, and information," Journal of Financial Economics, Elsevier, vol. 22(2), pages 229-252, December.
    3. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
    4. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-651.
    5. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 109-126, March.
    6. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1997. "One Day in the Life of a Very Common Stock," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 805-835.
    7. Vasiliki Plerou & Parameswaran Gopikrishnan & Xavier Gabaix & H. Eugene Stanley, 2001. "Quantifying Stock Price Response to Demand Fluctuations," Papers cond-mat/0106657, arXiv.org.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Market microstructure; insider trading; Glosten-Milgrom Model; asymmetric information; bid-ask spreads;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0509007. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.