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Author : Jeffrey Harold Harris
Publisher :
ISBN 13 :
Total Pages : 202 pages
Book Rating : 4.:/5 (334 download)
Download or read book The Cost Components of Bid-ask Spreads written by Jeffrey Harold Harris and published by . This book was released on 1995 with total page 202 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Steven V. Mann
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)
Download or read book The Bid-Ask Spread's Cost Components written by Steven V. Mann and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop and test a model that provides improved estimates of the bid-ask spread's cost components: order processing, adverse selection, and inventory control. The model incorporates three unique features: (1) a dealer's response to inventory imbalances is not static but depends on the size of the imbalance and the dealer's aversion to inventory risk; (2) active inventory management by a dealer will result in a stationary stochastic process for inventory; and (3) inventory management will influence the adverse selection cost component. We estimate the spread's components using intraday data for NYSE/AMEX and NASDAQ stocks. We also examine the impact of our model's features on the cost estimates. The results suggest inventory costs are higher and order processing costs are lower than previously reported.
Author : Sung-Hun Kim
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)
Download or read book Determinants of the Components of Bid-Ask Spreads on Stocks written by Sung-Hun Kim and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we show that George, Kaul and Nimalendran's (GKN) 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 provide new 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 percent of the bid-ask spread, sharply higher than the estimates of 8-10 percent obtained by GKN for NASDAQ stocks and 21 percent 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.
Author : Jeffrey Harold Harris
Publisher :
ISBN 13 :
Total Pages : 101 pages
Book Rating : 4.:/5 (154 download)
Download or read book The Cost Components of Bid-ask Spreads written by Jeffrey Harold Harris and published by . This book was released on 1995 with total page 101 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Paul Leventhal
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (11 download)
Download or read book Three Essays on the Cost Components of the Bid-ask Spread written by Paul Leventhal and published by . This book was released on 1999 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three interrelated essays. The first essay focuses on the adverse selection component of the bid-ask spread. A regime switching model applied to the trading process leads to a parsimonious model of the time-series evolution of the bid-ask spread in which market participants use trade data to answer the following question: Is there currently private information in the market for a given stock? If there is a high probability of private information in the market, this leads contemporaneously to a greater revision in beliefs about the true price. Together with compensation for transactions costs, this leads to a greater revision in transaction price. Using TSE 35 trade and quote data for March and May 1996, the pooled cross-section and time series results support this view. The second essay examines the costs of adverse information and order processing in light of transaction size, type of trader and type of trading method. Specifically, it is found that adverse selection increases with the trade size (consistent with numerous empirical studies relating trade size and the cost components of the bid-ask spread). However, whether the trade was undertaken by the designated market maker, by a principal trader or by an individual belonging to neither of these two categories is also of importance. In addition, we show that trades consummated within the investment dealer's firm have a lower adverse information cost component than trades executed externally. For order processing, it is found that the single most important determinant of cost is whether the transaction is internal or external to the investment dealer firm, with internal trades being more costly. The third essay examines the robustness of the Huang and Stoll (1997) model estimates to the use of different clustering methods and to a minimum quotation increment reduction (MQIR) on the Toronto Stock Exchange. We find that adequate reversal of trade flow is a necessary but not sufficient condition for model performance. We also find that model estimates are quite sensitive to the data clustering method selected. In addition, we show that this model fails to provide adequate cost component estimates of the spread in the post-MQIR period due to a fundamental change in market-maker behavior.
Author : Phillip R. Daves
Publisher :
ISBN 13 :
Total Pages : 40 pages
Book Rating : 4.:/5 (129 download)
Download or read book Electronic Communication Networks, Market Makers, and the Components of the Bid-Ask Spread written by Phillip R. Daves and published by . This book was released on 2014 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate why trading costs through Electronic Communication Networks (ECNs) are lower than trading costs with market makers through estimating the components of the bid-ask spread. Additionally, we show how the composition and size of bid-ask spreads change with the market environment. We find the adverse selection cost component of the bid-ask spread to be lower when ECNs are alone at the inside compared to when market makers are alone at the inside. The magnitude or size of the inside spread is largest during periods of high volatility but smallest when stock returns approach zero.
Author : Scott Gibson
Publisher :
ISBN 13 :
Total Pages : 34 pages
Book Rating : 4.:/5 (129 download)
Download or read book The Effect of Decimalization on the Components of the Bid-Ask Spread written by Scott Gibson and published by . This book was released on 2002 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: Previous empirical studies that decompose the bid-ask spread were done when securities traded in discrete price points equal to one-sixteenth or one-eighth of a dollar. These studies concluded that inventory and adverse-selection costs were economically insignificant compared to order-processing costs. Natural questions arise as to: (i) whether price discreteness allowed market makers to enjoy excess rents, thus reducing the significance of the inventory and adverse selection costs; (ii) whether discreteness decreased the traders' incentives to gather information; or (iii) whether methodologies previously employed mis-estimated the inventory and the adverse-selection costs. We show that the recent conversion to decimal pricing results in significantly tighter spreads. However, the dollar value of spreads attributed to adverse selection and inventory costs do not change significantly. Almost all of the reduction occurs in the order-processing component. As a result, inventory and adverse-selection costs now account for a significantly larger proportion of the traded spreads. A plausible explanation is that the minimum tick size constraint previously in place under fractional pricing allowed market makers to enjoy spreads that were larger than their actual costs.
Author : Ji-Chai Lin
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)
Download or read book Trade Size and Components of the Bid-Ask Spread written by Ji-Chai Lin and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The relation between theorized components of the bid-ask spread and trade size for a sample of NYSE firms is examined. We find that the adverse selection component increases uniformly with trade size. Conversely, order processing costs decrease with increases in trade size for all but the largest trades. We find that order persistence decreases with trade size. The adverse selection component is the highest at the beginning and lowest at the end of the day for all but the largest trades. Trades of NYSE firms executed on regional exchanges or Nasdaq contain a large order processing cost component but no significant adverse information effect.
Author : Timotheos Angelidis
Publisher :
ISBN 13 :
Total Pages : 32 pages
Book Rating : 4.:/5 (129 download)
Download or read book The Components of the Bid-Ask Spread written by Timotheos Angelidis and published by . This book was released on 2005 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the components of the bid-ask spread in the Athens Stock Exchange (ASE), which was recently characterized as a developed market. For 18 large and 13 medium capitalization stocks, we estimate the adverse selection and the order handling component of the spreads as well as the probability of a trade continuation on the same side of either the bid or the ask price, using the Madhavan et al. (1997) model. We extend it by incorporating the traded volume and we find that the adverse selection component exhibits U-shape patterns, while the cost component pattern depends on the stock price. For high priced stocks, the usual U-shape applies, while for low-priced ones, it is an increasing function of time, mainly due to the different magnitude of the order handling spread component. Our analysis shows that the order handling component dominates inventory effects, particularly in the first and last half hour of the trading day and hence we observe economies of scale in trading. Furthermore, the expected price change is higher in the low capitalization stocks, while the most liquid stocks are the high priced ones. Moreover, by estimating the Madhavan et al. (1997) model for two distinct periods we explain why there are differences in the components of the bid-ask spread.
Author : Stephen Satchell
Publisher : Springer
ISBN 13 : 1137554177
Total Pages : 416 pages
Book Rating : 4.1/5 (375 download)
Download or read book Derivatives and Hedge Funds written by Stephen Satchell and published by Springer. This book was released on 2016-05-18 with total page 416 pages. Available in PDF, EPUB and Kindle. Book excerpt: Over the last 20 years hedge funds and derivatives have fluctuated in reputational terms; they have been blamed for the global financial crisis and been praised for the provision of liquidity in troubled times. Both topics are rather under-researched due to a combination of data and secrecy issues. This book is a collection of papers celebrating 20 years of the Journal of Derivatives and Hedge Funds (JDHF). The 18 papers included in this volume represent a small sample of influential papers included during the life of the Journal, representing industry-orientated research in these areas. With a Preface from co-editor of the journal Stephen Satchell, the first part of the collection focuses on hedge funds and the second on markets, prices and products.
Author : Priyanka Singh
Publisher :
ISBN 13 :
Total Pages : 51 pages
Book Rating : 4.:/5 (13 download)
Download or read book Estimation of Bid-Ask Spread and Its Components in Indian Stock Market Using Trade Prices written by Priyanka Singh and published by . This book was released on 2013 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the absence of order-book data and limited information on quoted bid-ask spreads in the Indian stock market, this paper attempts to analyze the bid-ask spread in Indian market by estimating bid-ask spreads and its components from trade prices. The sample consists of tick-by-tick data for the time period January 2002 through to October 2008 of 160 stocks traded on the National Stock Exchange of India. We estimate implied bid-ask spreads and its components (adverse selection costs; combined inventory and order processing costs) using theoretical models. We find that all the models used in the study produce consistent estimates of bid-ask spreads and its components. In the Indian Stock Market, we find that the adverse selection cost and the combined order-processing and inventory-holding cost each account for approximately 50 percent of the bid-ask spread. We also find that the estimated bid-ask spreads are approximately 80 percent of the quoted bid-ask spreads. In our sample period, we find that the relative bid-ask spreads have decreased over the years.
Author : Nicolas P. B. Bollen
Publisher :
ISBN 13 :
Total Pages : 57 pages
Book Rating : 4.:/5 (129 download)
Download or read book Modeling the Bid/Ask Spread written by Nicolas P. B. Bollen and published by . This book was released on 2012 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: The need to understand and measure the determinants of market maker bid/ask spreads is crucial in evaluating the merits of competing market structures and the fairness of market maker rents. After providing a brief review of past work, this study develops a simple, parsimonious model for the market maker's spread that accounts for the effects of price discreteness induced by minimum tick size, order-processing costs, inventory-holding costs, adverse selection, and competition. The inventory-holding and adverse selection cost components of spread are modeled as an option with a stochastic time to expiration. This inventory-holding premium embedded in the spread represents compensation for the price risk borne by the market maker while the security is held in inventory. The premium is partitioned in such a way that the inventory holding and adverse selection cost components and the probability of an informed trade are identified. The model is tested empirically on a sample of NASDAQ stocks over three distinct tick size regimes and is shown to perform well.
Author : Jason Lee
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (13 download)
Download or read book Earnings Announcements and the Components of the Bid-Ask Spread written by Jason Lee and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates the behavior of the components of the bid-ask spread around earnings announcements. The authors find that the adverse selection cost component significantly increases surrounding the announcements, while the inventory holding and order processing components significantly decline during the same periods. Their results suggest that the directional change in the total bid-ask spread depends on the relative magnitudes of the changes in these three components. Specifically, the decreases in inventory holding costs and order processing costs imply that earnings announcements may have an insignificant impact on the total bid-ask spread, even when they result in increased information asymmetry.Copyright 1996 by American Finance Association.
Author : Gautam Kaul
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)
Download or read book Estimation of the Bid-Ask Spread and its Components written by Gautam Kaul and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We show that time variation in expected returns and/or partial price adjustments lead to a downward bias in previous estimators of both the spread and its components. We introduce a new approach that provides unbiased and efficient estimators of the components of the spread. We find that between 77 and 97 percent of the downward bias in previous spread estimate is caused by time variation in expected returns. More importantly, the adverse-selection component, though significant, accounts for a much smaller proportion (8 to 13 percent) of the quoted spread, at least for small trades, than the proportion (over 40 percent) previously reported in the literature. Order processing costs are the predominant component of quoted spreads.
Author : Hans R. Stoll
Publisher :
ISBN 13 :
Total Pages : 88 pages
Book Rating : 4.3/5 (512 download)
Download or read book Stock Market Structure, Volatility, and Volume written by Hans R. Stoll and published by . This book was released on 1990 with total page 88 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Paul Brockman
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)
Download or read book Bid-Ask Spread Components in an Order-Driven Environment written by Paul Brockman and published by . This book was released on 2001 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The purpose of this study is to extend the bid-ask spread decomposition literature into the order-driven environment. The use of electronic limit order books combined with order-driven market making has been increasing rapidly in recent years because of improvements in information technology and financial market deregulation. To date, reported bid-ask spread decompositions rely almost exclusively on quote-driven or hybrid systems. This study provides bid-ask spread component estimates from one of the world's largest order-driven markets, the Stock Exchange of Hong Kong. Based on a sample of over six million observations, we estimate a median adverse selection component of 33 percent and a median order processing component of 45 percent of the spread. Dollar volume-based decile portfolios show significant cross-sectional variation for adverse selection costs but insignificant variation for order processing costs. Finally, order persistence is consistently positive for all deciles and displays a direct relation with the level of trading activity.
Author : Yakov Amihud
Publisher : Now Publishers Inc
ISBN 13 : 1933019123
Total Pages : 109 pages
Book Rating : 4.9/5 (33 download)
Download or read book Liquidity and Asset Prices written by Yakov Amihud and published by Now Publishers Inc. This book was released on 2006 with total page 109 pages. Available in PDF, EPUB and Kindle. Book excerpt: Liquidity and Asset Prices reviews the literature that studies the relationship between liquidity and asset prices. The authors review the theoretical literature that predicts how liquidity affects a security's required return and discuss the empirical connection between the two. Liquidity and Asset Prices surveys the theory of liquidity-based asset pricing followed by the empirical evidence. The theory section proceeds from basic models with exogenous holding periods to those that incorporate additional elements of risk and endogenous holding periods. The empirical section reviews the evidence on the liquidity premium for stocks, bonds, and other financial assets.
