Components of the Bid-Ask Spread and the Statistical Properties of Transaction Prices

Lawrence R Glosten

Journal of Finance, 1987, vol. 42, issue 5, 1293-1307

Abstract: The bid-ask spread can be decomposed into two parts-one part due to asymmetric informat ion and the other part due to other factors such as monopoly power. T he part due to asymmetric information attenuates statistical biases i n mean return, variance, and serial covariance. Thus, using spread da ta to adjust for biases in return moments requires knowing not only t he spread but the composition of the spread. Furthermore, any spread estimation procedure using transaction prices must estimate two sprea d components. Copyright 1987 by American Finance Association.

Date: 1987
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