Components of the Effective Spread: Evidence from the Warsaw Stock Exchange

Abstract

The paper provides empirical investigation of the effective spread and its two components complementing each other: (1) the realized spread and (2) the price impact component. The estimated liquidity measures are derived from high-frequency intraday data on the Warsaw Stock Exchange (WSE). Daily proxies of percentage effective spread, percentage realized spread, and percentage price impact values are analysed for 53 WSE-traded companies divided into three size groups. As the raw dataset does not identify the trade direction, the trade classification Lee and Ready (J Financ 46:733–746, 1991) algorithm is employed to infer the trade side and to distinguish between the so-called buyer- and seller-initiated trades. Moreover, the paper provides a robustness analysis of the obtained results with respect to the whole sample and three adjacent sub-samples, each of equal size: the pre-crisis, Global Financial Crisis (GFC), and post-crisis periods. The evidence is that the empirical results rather do not depend on a firm size and turn out to be robust to the choice of the period. Furthermore, the hypothesis concerning statistical significance of correlation coefficients between daily values of three estimated measures employed in the study is tested.