Chapter 3 Exogenous Uncertainty Increases the Bid–Ask Spread in the Continuous Double Auction

Abstract

Publisher Summary This chapter focuses on the exogenous uncertainty increases the bid–ask spread in the continuous double auction. These experiments demonstrate that exogenous uncertainty can increase the bid–ask spread in the continuous double auction. This chapter observes greater mean and median spreads, and a greater probability of a large spread in double auctions with randomly shifting perperiod supply and demand than in double auctions with constant supply and demand. These results, and many others, demonstrate that even in the absence of transaction cost or information asymmetry, positive bid–ask spreads are observed and wider spreads are observed when there is greater uncertainty in the environment. A measurement problem associated with the prediction is that contracts may and often do occur without a defined bid–ask spread or before that spread has a chance to narrow. Thus, a bid may be entered and accepted before an ask price is established.