INCORPORATING PRICE-RELEVANT INFORMATION BETWEEN QUOTES AND TRADES: A NEW MEASURE OF THE EFFECTIVE BID-ASK SPREAD

Sung-Hun Kim and Joseph P. Ogden ()
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Sung-Hun Kim: Korea Institute of Finance, KFB Building, 4-1,1-Ga, Myong-Dong, Chung-Gu, Seoul, Korea
Joseph P. Ogden: School of Management, 349 Jacobs Management Center, University at Buffalo, SUNY, Buffalo, NY 14260, USA

International Journal of Theoretical and Applied Finance (IJTAF), 1999, vol. 02, issue 02, 179-200

Abstract: This paper provides a new measure of the effective bid-ask spread in a dealer-auction. Our measure differs from the "quote-to-trade" measures derived from direct comparisons of trade prices with bid and ask quotes by explicitly incorporating the price effect of information arriving between the time a set of quotes is posted and the next trade, which will tend to be reflected in the trade price but not in the quotes, as well as the price effect in the situation vice versa. For NYSE/AMEX stocks in 1993, our measure yields estimates of the effective spread that are lower than estimates obtained using the quote-to-trade measure, and our estimates are, on average, only 31 percent of the quoted spread. We also find aU-shaped intraday pattern for our estimates of effective spread that is consistent with, but is much more pronounced than, the pattern that has been observed in previous studies. We provide a conjecture as to why this pattern may be related to theU-shaped intraday pattern observed in volume and volatility.

Keywords: Bid-ask spread; Effective bid-ask spread; Market microstructure (search for similar items in EconPapers)
Date: 1999
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DOI: 10.1142/S0219024999000121

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