How Important Is Informed Trading for the Bid-Ask Spread? Evidence from an Emerging Market

Jan Hanousek () and Richard Podpiera ()

Abstract: The link between informed trading and the bid-ask spread has been the focus of abundant literature and some authors feared that a large amount of informed trading might lead to shutdown of markets. We explore this issue using data from the Czech Republic. Our estimates confirm that the share of informed trading and its variability is indeed high relative to developed markets, however, share of the adverse selection component is only 14% of the spread. Since the Czech Republic has been known in the financial community as being plagued by informed trading, our findings suggest that the relative importance of adverse selection as a determinant of the spread is generally low across markets.

Keywords: market microstructure; informed trading; bid-ask spread; adverse selection (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: Written 2001-02-05
Note: Type of Document - Acrobat PDF; pages: 36 ; figures: included
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http://129.3.20.41/eps/fin/papers/0012/0012003.pdf (application/pdf)

Related works:
Working Paper: How Important Is Informed Trading for the Bid-Ask Spread? Evidence from an Emerging Market (2000)
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