The adverse selection component for the bid-ask spread: A revision of its estimation models
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Published
18-09-2018
José Emilio Farinós Viñas
C. José García
Ana María Ibáñez Escribano
Abstract
One of the main interests of market microstructure is the estimation of the bid–ask spread components from financial data, specially the adverse selection component given the implications of its own existence. As a result, several empirical models based on price time–series statistical properties have been developed in order to estimate them. Recent greater financial data availability has allowed the development of models that focus on price discovery and use more statistical complex methodologies like GMM or VAR. This paper analyses this set of models that allows the estimation of the bid–ask spread components from price dynamics, specifically, the estimation of the adverse selection component in time series. Actually, this sort of models are a powerful tool to investigate how information is incorporated into quotes.
How to Cite
Farinós Viñas, J. E., García, C. J., & Ibáñez Escribano, A. M. (2018). The adverse selection component for the bid-ask spread: A revision of its estimation models. Cuadernos De Gestión, 5(1), 13–35. https://doi.org/10.5295/cdg.19171jf
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Keywords
Market microstructure, insider trading, spread, adverse selection component, transaction cost
References
AMIHUD, Y. y H. MENDELSON (1980): «Dealership market: market making with inventory», Journal of Financial Economics 8, 31-53.
BAGEHOT, W. (1971): «The only game in town», Financial Analyst Journal 10-2
CLARKE, J y K SHASTRI (2001): «On information asymmetry metrics», Workig Paper SSRN.
COPELAND, T. y H. STOLL (1990): Trading Markets en Handbook of Modern Finance, 2.ª ed., Warren, Gorham & Lamont. Boston.
COPELAND, T.E. y D. GALAI (1983): «Information effects on the bid/ask spread», Journal of Finance 38, 1257-1269.
DEMSETZ, H. (1968): «The cost of transacting», Quarterly Journal of Economics 82, 33-53.
EASLEY, D. y M. O’HARA (1987): «Price, trade size, and information in securities markets», Journal of Finance 51, 1205-1236.
EASLEY, D; N. KIEFER; M. O’HARA y J. PAPERMAN (1996): «Liquidity, information, and infrequently traded stocks», Journal of Financial Economics 19, 69-90.
GLOSTEN, R y L. HARRIS (1988): «Estimating the components of the bid-ask spread» Journal of Financial Economics 21, 103-122.
GLOSTEN, L. y P. MILGRON (1985): «Bid, ask, and transaction prices in a specialist market with heterogeneously informed traders», Journal of Financial Economics 12, 71-100.
HASBROUCK, J (1991): «Measuring the information content of stock trades», Journal of Finance 46, 179-207.
HASBROUCK, J (1991): «The summary informativeness of stock traders: an econometric analysis», Review of Financial Studies 4, 571-595.
HO, T. y H. STOLL (1981): «Optimal dealer pricing under transactions and return uncertainty», Journal of Financial Economics 9, 47-63.
HUANG, R. y H. STOLL (1997): «The components of the bid-ask spread: a general approach», Review of Financial Studies.10, 995-1034.
IBÁÑEZ, A.M. (2001):»Incorporación de la información en el Mercado Bursátil Español: Impacto del anuncio de una OPA». Tesis Doctoral. Universidad de Valencia.
KIM, S.H. y J.P. OGDEN (1996): «Determinants of the components of bid-ask spread on stocks», European Financial Management 1, 107-125.
KYLE, A.P. (1985): «Continuous auctions and insider trading», Econometrica 53, 1113-1135.
KYLE, A.P. (1989): «Informed speculation with imperfect competition», Review of Economics Studies 56, 317-356.
LIN, J; G. SANGER y G. BOOTH (1995): «Trade size and components of the bid-ask spread», Review of Financial Studies 8, 1133-1203.
MADHAVAN, A; M. RICHARDSON y M. ROOMANS (1997): «Why do security prices change? A transaction-level analysis of NYSE stocks», The Review of Financial Studies 10, 1035-1064.
MENYAH, K. y K. PAUDYAL (2000): «The components of bid-ask spreads on the London Stock Exchange», Journal of banking and Finance 24, 1767-1785.
NYHOLM, K. (2002): «Estimating the probability of informed trading», Journal of Financial Rersearch 35, 485-505.
RANALDO, A (2002): «Market dynamics around public information arrivals» FAME, research paper 45.
ROLL, R. (1984): «A simple implicit measure of the effective bid-ask spread in an efficient market», Journal of Finance 39, 1107-1119.
STOLL, H.R. (1989): «Inferring the components of the bid-ask spread: Theory and empirical tests», Journal of Finance 44, 113-112.
VAN NESS, B; R. VAN NESS y R. WARR (2001): «How well do adverse selection components measure adverse selection?», Financial Management, Otoño, 77-98.
BAGEHOT, W. (1971): «The only game in town», Financial Analyst Journal 10-2
CLARKE, J y K SHASTRI (2001): «On information asymmetry metrics», Workig Paper SSRN.
COPELAND, T. y H. STOLL (1990): Trading Markets en Handbook of Modern Finance, 2.ª ed., Warren, Gorham & Lamont. Boston.
COPELAND, T.E. y D. GALAI (1983): «Information effects on the bid/ask spread», Journal of Finance 38, 1257-1269.
DEMSETZ, H. (1968): «The cost of transacting», Quarterly Journal of Economics 82, 33-53.
EASLEY, D. y M. O’HARA (1987): «Price, trade size, and information in securities markets», Journal of Finance 51, 1205-1236.
EASLEY, D; N. KIEFER; M. O’HARA y J. PAPERMAN (1996): «Liquidity, information, and infrequently traded stocks», Journal of Financial Economics 19, 69-90.
GLOSTEN, R y L. HARRIS (1988): «Estimating the components of the bid-ask spread» Journal of Financial Economics 21, 103-122.
GLOSTEN, L. y P. MILGRON (1985): «Bid, ask, and transaction prices in a specialist market with heterogeneously informed traders», Journal of Financial Economics 12, 71-100.
HASBROUCK, J (1991): «Measuring the information content of stock trades», Journal of Finance 46, 179-207.
HASBROUCK, J (1991): «The summary informativeness of stock traders: an econometric analysis», Review of Financial Studies 4, 571-595.
HO, T. y H. STOLL (1981): «Optimal dealer pricing under transactions and return uncertainty», Journal of Financial Economics 9, 47-63.
HUANG, R. y H. STOLL (1997): «The components of the bid-ask spread: a general approach», Review of Financial Studies.10, 995-1034.
IBÁÑEZ, A.M. (2001):»Incorporación de la información en el Mercado Bursátil Español: Impacto del anuncio de una OPA». Tesis Doctoral. Universidad de Valencia.
KIM, S.H. y J.P. OGDEN (1996): «Determinants of the components of bid-ask spread on stocks», European Financial Management 1, 107-125.
KYLE, A.P. (1985): «Continuous auctions and insider trading», Econometrica 53, 1113-1135.
KYLE, A.P. (1989): «Informed speculation with imperfect competition», Review of Economics Studies 56, 317-356.
LIN, J; G. SANGER y G. BOOTH (1995): «Trade size and components of the bid-ask spread», Review of Financial Studies 8, 1133-1203.
MADHAVAN, A; M. RICHARDSON y M. ROOMANS (1997): «Why do security prices change? A transaction-level analysis of NYSE stocks», The Review of Financial Studies 10, 1035-1064.
MENYAH, K. y K. PAUDYAL (2000): «The components of bid-ask spreads on the London Stock Exchange», Journal of banking and Finance 24, 1767-1785.
NYHOLM, K. (2002): «Estimating the probability of informed trading», Journal of Financial Rersearch 35, 485-505.
RANALDO, A (2002): «Market dynamics around public information arrivals» FAME, research paper 45.
ROLL, R. (1984): «A simple implicit measure of the effective bid-ask spread in an efficient market», Journal of Finance 39, 1107-1119.
STOLL, H.R. (1989): «Inferring the components of the bid-ask spread: Theory and empirical tests», Journal of Finance 44, 113-112.
VAN NESS, B; R. VAN NESS y R. WARR (2001): «How well do adverse selection components measure adverse selection?», Financial Management, Otoño, 77-98.
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