Determinants Of The Components Of Bid Ask Spreads On Stocks
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Determinants of the Components of Bid-Ask Spreads on Stocks
Author | : Sung-Hun Kim |
Publisher | : |
Total Pages | : |
Release | : 1998 |
Genre | : |
ISBN | : |
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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.
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