An Intraday Examination of the Components of the Bid–Ask Spread

Thomas McInish () and Bonnie F. Van Ness

The Financial Review, 2002, vol. 37, issue 4, 507-524

Abstract: Using transactions data for a sample of NYSE stocks, we decompose the bid–ask spread (BAS) into order–processing (OP) and asymmetric information (AI) components using the techniques of George, Kaul, and Nimalendran (1991) and Madhavan, Richardson, and Roomans (1997). McInish and Wood (1992) demonstrate that the intraday behavior of BASs can be explained by variables measuring activity, competition, risk, and information. We investigate whether these variables explain the behavior of the OP and AI components of the spread over the trading day. We conclude that, on balance, the variables that determine the aggregate BAS also determine its intraday components.

Date: 2002
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