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- Title
Components of the Bid-Ask Spread and the Statistical Properties of Transaction Prices.
- Authors
GLOSTEN, LAWRENCE R.
- Abstract
The bid-ask spread can be decomposed into two parts: one part due to asymmetric information and the other part due to other factors such as monopoly power. The part due to asymmetric information attenuates statistical biases in mean return, variance, and serial covariance. Thus, using spread data to adjust for biases in return moments requires knowing not only the spread but the composition of the spread. Furthermore, any spread-estimation procedure using transaction prices must estimate two spread components. On the other hand, the appropriateness of some previously suggested statistical corrections is independent of the spread composition.
- Subjects
PRICES of securities; ASKED price; BID price; SPREAD (Finance); INFORMATION asymmetry; TENDER offers; TRANSACTION costs; RATE of return; SECURITIES trading; INVESTORS; ADVERSE selection (Commerce); MARKET makers; ECONOMICS
- Publication
Journal of Finance (Wiley-Blackwell), 1987, Vol 42, Issue 5, p1293
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1987.tb04367.x