Information asymmetry and the bid-ask spread: evidence from the UK

Andros Gregoriou, Christos Ioannidis, L Skerratt

Research output: Contribution to journalArticle

Abstract

The generally accepted factors that determine the bid‐ask spread are volatility, trading volume and market value (Atkins and Dyl, 1997; Glosten and Harris, 1988; and Menyah and Paudyal, 2000). Following Kim and Verrecchia (1994) we include a measure of the disagreement in analysts’ earnings forecasts in our model of the bid ask spread. This measure serves as a proxy for the informational disadvantage of market makers with respect to informed traders. Market makers respond to the additional risk by increasing the bid‐ask spread. We find that the disagreement amongst analysts is significant for horizons up to and including six months (and with the hypothesised sign) in explaining FTSE 100 company spreads, rendering strong empirical support for our model.
Original languageEnglish
Pages (from-to)1801-1826
Number of pages26
JournalJournal of Business Fnance and Accounting
Volume32
Issue number9-10
DOIs
Publication statusPublished - 2005

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Information asymmetry
Bid/ask spread
Market makers
Disadvantage
Analysts
Trading volume
Factors
Informed traders
Market value
Analysts' earnings forecasts

Cite this

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Information asymmetry and the bid-ask spread: evidence from the UK. / Gregoriou, Andros; Ioannidis, Christos; Skerratt, L.

In: Journal of Business Fnance and Accounting, Vol. 32, No. 9-10, 2005, p. 1801-1826.

Research output: Contribution to journalArticle

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