Evaluating spread models with a basket security

Patricia Chelley-Steeley and Keebong Park

Applied Financial Economics, 2012, vol. 22, issue 4, pages 259-283

Abstract: In this article we evaluate the most widely used spread decomposition models using Exchange Traded Funds (ETFs). These funds are an example of a basket security and allow the diversification of private information causing these securities to have lower adverse selection costs than individual securities. We use this feature as a criterion for evaluating spread decomposition models. Comparisons of adverse selection costs for ETF's and control securities obtained from spread decomposition models show that only the Glosten--Harris (1988) and the Madhavan--Richardson--Roomans (1997) models provide estimates of the spread that are consistent with the diversification of private information in a basket security. Our results are robust even after controlling for the stock exchange.

Date: 2012
References: Add references at CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1080/09603107.2011.589803 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:taf:apfiec:v:22:y:2012:i:4:p:259-283

Ordering information: This journal article can be ordered from
http://www.tandf.co.uk/journals/subscription.asp

Access Statistics for this article

Applied Financial Economics is edited by Mark P. Taylor

More articles in Applied Financial Economics from Taylor and Francis Journals
Series data maintained by Michael McNulty ().