Estimating the components of the bid/ask spread

This paper develops and implements a technique for estimating a model of the bid/ask spread. The spread is decomposed into two components, one due to asymmetric information and one due to inventory costs, specialist monopoly power, and clearing costs. The model is estimated using NYSE common stock t...

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Bibliographic Details
Published in:Journal of financial economics 1988-05, Vol.21 (1), p.123-142
Main Authors: Glosten, Lawrence R, Harris, Lawrence E
Format: Article
Language:English
Subjects:
Asked price
Bid price
Estimating techniques
Mathematical models
Securities trading
Spread
Statistical analysis
Stock prices
Studies
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Summary:This paper develops and implements a technique for estimating a model of the bid/ask spread. The spread is decomposed into two components, one due to asymmetric information and one due to inventory costs, specialist monopoly power, and clearing costs. The model is estimated using NYSE common stock transaction prices in the period 1981–1983. Cross-sectional regression analysis is then used to relate time-series estimated spread components to other stock characteristics. The results cannot reject the hypothesis that significant amounts of NYSE common stock spreads are due to asymmetric information.
ISSN:0304-405X
1879-2774
DOI:10.1016/0304-405X(88)90034-7