BID-ASK SPREAD COMPONENTS AROUND ANTICIPATED ANNOUNCEMENTS

In this paper I re-examine spreads around dividend and earnings announcements and provide new evidence on patterns by examining the components of the bid-ask spread. Transaction data are examined through a recently developed spread decomposition model that decomposes the bid-ask spread into a fixed (execution) component and an adverse selection component. In addition, this model does not rely on a constant spread as previous spread decomposition models require. The results show that around earnings announcements, the bid-ask spreads and spread components have significant changes indicating that the anticipated announcement is informative. However, the actual public announcement of a dividend does not alter the bid-ask spread and spread components of actively traded securities.     

BID-ASK SPREAD COMPONENTS IN AN ORDER-DRIVEN ENVIRONMENT

The purpose of this study is to extend the bid-ask spread decomposition literature into the order-driven environment. The use of electronic limit order books, combined with order-driven market making, has been increasing rapidly in recent years because of improvements in information technology and financial market deregulation. To date, reported bid-ask spread decompositions rely almost exclusively on quote-driven or hybrid systems. This study provides bid-ask spread component estimates from one of the world's largest order-driven markets, the Stock Exchange of Hong Kong. Based on a sample of over six million observations, we estimate a median adverse selection component of 33 percent and a median order processing component of 45 percent of the spread. Dollar-volume-based decile portfolios show significant cross-sectional variation for adverse selection costs but insignificant variation for order processing costs. Finally, order persistence is consistently positive for all deciles and displays a direct relation with the level of trading activity.     

民币对美元日汇率决定模型研究

基于汇率决定理论的最新研究进展．本文分析了人民币对美元日汇率的影响因素。研究发现,宏观经济新闻、外汇市场微观因素买卖价差是人民币对美元日汇率的重要影响因素,而中美相对利率并不是人民币对美元日汇率的影响因素。进一步,本文将随机游走模型、新闻变量以及外汇市场微观因素结合起来,构建了人民币对美元日汇率决定理论模型。实证研究发现,人民币对美元日汇率由自身滞后值、中国经济活动方面的新闻和零售市场买卖价差决定。     

THE DEALERS' PRICE/SIZE QUOTE AND MARKET LIQUIDITY

We model trading in a competitive securities market where informed traders and liquidity traders transact with dealers. The dealers' entire published quote is modeled: bid-ask prices and the number of shares the dealer is willing to buy/sell at these prices (i.e., size quotes). We argue that size quotes are a more informative indicator of market liquidity than the bid-ask spread's adverse-selection component. Moreover, the size quotes reveal several market characteristics that cannot be inferred from the bid-ask spread's adverse-selection component alone. The model generates a number of empirically testable predictions that clarify certain key elements of market liquidity.     

Bid-ask spreads in the market for forward exchange

Recent empirical testing of interest rate parity places a crucial role on the existence of transactions costs in the form of the bid-ask spread. Existing theoretical models tie in the bid-ask spread to exchange rate uncertainty. This paper directs itself to a formal model of the forward exchange market to show that foreign exchange uncertainty per se is not the cause of fluctuating bid-ask spreads. Instead emphasis is placed on relative degrees of absolute risk aversion and the heterogeneity of information sets.     

Automating german equity trading: Bid-ask spreads on competing systems

As a result of automating trading in the most active German stocks, data on bid-ask spreads on three competing system—IBIS, MATIS, and SEAQ International—have become available. The intraday pattern of spreads suggests a mid-session effect and a home-market effect. Contrary to what one might expect, the spreads for identical stocks differ substantially from system to system. Paradoxically, the system with the lowest spreads, MATIS, did not attract most of the volume. Actually, its market share declined. In an attempt to explain the MATIS paradox we hypothesize that bid-ask spreads compensate the market maker for a bundle of several transaction services of which providing immediacy is merely one. This complicates both national and international spread comparisons and has implications for the decomposition of observed bid-ask spreads.     

Trade Disclosure,Information Learning and Securities Market Performance

In this paper we examine the effect of information disclosure on securities market performance when liquidity traders are able to acquire information about inside trading. We show that the bid-ask spread increases with the liquidity trader's learning efficiency, which is greater when trade information is disclosed. The bid-ask spread is always higher when trade information is not disclosed. However, the discrepancy between the bid-ask spreads with and without information disclosure narrows when the learning efficiency increases. We also show that the gains of the informed traders in a market without trade information disclosure are reduced in the presence of the liquidity trader's learning. Nevertheless, liquidity traders do not necessarily benefit from increased transparency. In particular, liquidity traders may face higher trading costs.     

A SIMPLE MODEL OF BID-ASK SPREAD AND SEARCH

This paper analyzes a simple search model of market making in which the agents can choose between searching for a trading partner or trading through the market-maker. Explicit solutions for the equilibrium search intensities and the bid-ask spread have been provided. Equilibrium search intensities and the bid-ask spread reflect the strategic interaction between the agents and the market-maker: an increase in the bid-ask spread results in higher search intensities. The bid-ask spread, on the other hand, reacts negatively to an increase in the search intensities (due to lower search costs, higher efficiency of search, or higher gains from a match). It is also shown that the introduction of a market-maker increases the seller's reservation price and decreases the buyer's reservation price, hence narrowing the price dispersion.     

Liquidity of the CBOE Equity Options

We examine the CBOE option market depth and bid-ask spreads. Absence of price effects surrounding large option trades suggests excellent market depth. However, bid-ask spreads for the CBOE options and the NYSE stocks are nearly equal, even though an average option is equivalent to less than half a stock plus borrowing. We explain this tradeoff between market depth and bid-ask spreads on the CBOE and the NYSE by differences in market mechanisms. We also show that the adverse-selection component of the option spread, which measures the extent of information-related trading on the CBOE, is very small.     

Information Effects on the Bid-Ask Spread

An individual who chooses to serve as a market-maker is assumed to optimize his position by setting a bid-ask spread which maximizes the difference between expected revenues received from liquidity-motivated traders and expected losses to information-motivated traders. By characterizing the cost of supplying quotes, as writing a put and a call option to an information-motivated trader, it is shown that the bid-ask spread is a positive function of the price level and return variance, a negative function of measures of market activity, depth, and continuity, and negatively correlated with the degree of competition. Thus, the theory of information effects on the bid-ask spread proposed in this paper is consistent with the empirical literature.     

Information Asymmetry Around Earnings Announcements

This study examines bid-ask spreads to determine how the anticipation and release of earnings announcements affect information asymmetry in the stock market. I use regression analysis and find that bid-ask spreads are negatively related to public information availability and positively related to earnings variability and the market reaction to prior unexpected earnings. The results suggest that firms for which earnings is expected to yield a relatively larger stock market reaction have greater information asymmetry than firms for which earnings are expected to yield a smaller market reaction.I also find that bid-ask spreads gradually increase in the four days prior to earnings announcements, and increase sharply the day prior to, the day of and the day after the earnings announcements. Bid-ask spreads seven to ten days after earnings announcements are not significantly different from bid-ask spreads seven to ten days prior to earnings announcements.     

金融期货最小价格变化单位的市场影响与最优水平

最小价格变化单位是买卖价差的底线，设置过高会人为地提高买卖价差的水平，增加交易费用；过低又会降低市场深度，增加交易谈判成本，影响交易效率。对最优价格升降档位的设定，要综合考虑精度要求、合约乘数、交易谈判成本和实际买卖价差水平等因素；而以实际买卖价差的底线作为最小价格升降档位，能较好地避免人为抬高买卖价差的情况出现。     

Liquidity and stock returns in pure order-driven markets: evidence from the Australian stock market

This paper examines the relationship between liquidity and stock returns in the pure order-driven stock market of Australia. The bid-ask spread, turnover rate, and amortized spread are used as proxies for liquidity. In addition to liquidity, other factors that have been found to influence stock returns, such as beta and size, are also considered. Seemingly unrelated regressions (SUR) and the cross-sectionally correlated timewise autoregressive (CSCTA) model form the methodological basis for this research. A small liquidity premium is found in the Australian market, which persists for the entire year. There is also strong evidence of a negative size effect.     

The optimal bid-ask price strategies of high-frequency trading and the effect on market liquidity

We propose a model for determining the optimal bid-ask spread strategy by a high-frequency trader (HFT) who has an informational advantage and receives information about the true value of a security. We employ an information cost function that includes volatility and the volume of the asset. Subsequently, we characterize the optimal bid-ask price strategies and obtain a stable bid-ask spread. We assume that orders submitted by low-frequency traders (LFTs) and news events arrive at the market with Poisson processes. Additionally, our model supports the trading of the two-sided quote in one period. We find that more LFTs and a higher exchange latency both hurt market liquidity. The HFT prefers to choose a two-sided quote to gain more profits while cautiously chooses a one-sided quote during times of high volatility. The model generates some testable implications with supporting empirical evidence from the NASDAQ-OMX Nordic Market.     

Discrete-time option pricing with stochastic liquidity

Classical option pricing theories are usually built on the law of one price, neglecting the impact of market liquidity that may contribute to significant bid-ask spreads. Within the framework of conic finance, we develop a stochastic liquidity model, extending the discrete-time constant liquidity model of Madan (2010). With this extension, we can replicate the term and skew structures of bid-ask spreads typically observed in option markets. We show how to implement such a stochastic liquidity model within our framework using multidimensional binomial trees and we calibrate it to call and put options on the S&P 500.     

Liquidity in auction and specialist market structures: Evidence from the Italian bourse

Several studies find that bid-ask spreads for stocks listed on the NYSE are lower than for stocks listed on NASDAQ. While this suggests that specialist market structures provide greater liquidity than competing dealer markets, the nature of trading on the NYSE, which comprises a specialist competing with limit order flow, obfuscates the comparison. In 2001, a structural change was implemented on the Italian Bourse. Many stocks that traded in an auction market switched to a specialist market, where the specialist controls order flow. Results confirm that liquidity is significantly improved when stocks commence trading in the specialist market. Analysis of the components of the bid-ask spread reveal that the adverse selection component of the spread is significantly reduced. This evidence suggests that specialist market structures provide greater liquidity to market participants.     

Market Making and Trading in Nasdaq Stocks

This paper examines the relations between the number of market makers, trading activity, and price improvement in Nasdaq stocks, using a model motivated by Grossman and Miller (1988). Results indicate a positive relation between the number of market makers and trading frequency, and that competition among market makers reduces effective bid-ask spreads. Results estimated using a simultaneous equations framework support the model predictions of Grossman and Miller. Results also indicate that trading frequency may be more important than trade size in determining the number of market makers.     

Explaining co-movements between equity and CDS bid-ask spreads

In this paper I show that the co-movements between bid-ask spreads of equities and credit default swaps vary over time and increase over crisis periods. The co-movements are strongly related to systematic risk factors and to the theoretical debt-to-equity hedge ratio. I document that hedging and asymmetric information, besides higher funding costs and market volatility risk, are driving factors of the commonality and are significantly priced in CDS bid-ask spreads.     

Dealer Markets Under Stress: The Performance of NASDAQ Market Makers During the November 15, 1991, Market Break

The liquidity of the NASDAQ market was seriously undermined during the crash on October 19, 1987, when bid-ask spreads widened dramatically and dealers reputedly withdrew from market making. This paper studies the liquidity of 36 NASDAQ issues on November 15, 1991, when average prices fell over 4%, representing the first major correction in the post-crash era. We find that bid-ask spreads, the percentage of dealers posting inside quotes, and trading volume remained virtually unaffected. Effective spreads were also largely unaffected, except for trades in excess of 1,000 shares among issues whose market makers avoided odd-eighth quotes. Our evidence implies that, unlike October 1987, the liquidity of the NASDAQ market did not deteriorate appreciably during this episode of unusual market stress.     

The economic benefits of FASB's recommended disclosures: Evidence from the pharmaceutical industry

Prior research has documented an association between disclosure quality and various economic benefits, most notably between the cost of equity capital and market liquidity. We extend this literature by investigating whether pharmaceutical firms that comply with recommended voluntary disclosures of the Financial Accounting Standards Board (FASB) exhibit lower bid-ask spreads, greater market depth, and lower cost of equity capital. Cross-sectional analysis using pharmaceutical firms reveals a negative association between disclosure quality and bid-ask spreads (both the total spread and its adverse-selection component), but no association between disclosure quality and either market depth or the ex ante cost of equity capital. Overall, our findings provide some evidence of benefits accruing to pharmaceutical firms that comply with the FASB's recommended voluntary disclosures under the assumption that lower bid-ask spreads reduce the cost of capital and strong evidence that complying with FASB's recommended disclosures provide a direct benefit to small investors, those who bear the entire weight of bid-ask spreads.