An Econometric Analysis for the Behavior of the Bid-Ask Spread

H De La Fuente-Mella,B Silva-Palavecinos,R Campos-Espinoza,D Cademartori-Rosso

doi:10.4236/jss.2013.17001

Abstract

Information asymmetries are an important element in the functioning of capital markets. An indirect means of measuring information asymmetry is through the spread of stock prices. The purpose of this paper is to identify the explanatory variables and the determinants of the bid-ask spread and to quantify the influence that the actors involved in the brokering of publically offered securities may have over the spread. The methodology used to model the time series for each of the analyzed companies is based on a time series from each of the observed econometric multivariate processes. The analysis shows a significantly negative relationship between the spread and the market-maker size, calculated in terms of both the equity and the stock portfolio; likewise, activity is measured by observing the amount offered for purchase and/or sale.

Highlights

According to the economic theory associated with managing organizations, the separation of ownership and company leadership is common and does not automatically produce a corresponding alignment of objectives between management and investors
A larger spread is associated with greater information asymmetry (Amihud & Mendelson, 1989; Coller & Yohn, 1997; Kim & Verrecchia, 1994; Bollen et al, 2004)
For certain companies, many stockbroker variables were included, but few were related to the transaction or broker size

Summary

Introduction

According to the economic theory associated with managing organizations, the separation of ownership and company leadership is common and does not automatically produce a corresponding alignment of objectives between management and investors. This situation produces an agency dilemma, which according to the Theory of Firms (Jensen & Meckling, 1976), is strongly linked with asymmetries in corporate information. Financial analysts draw greater spreads when they perceive that there is more information asymmetry (Kim & Verrecchia, 1994; Coller & Yhon, 1997). According to Venkatesh and Chiang (1986), analysts tend to expand the spread when they think that the information advantage for informed traders has increased

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Conclusion