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An Intraday Examination of the Components of the Bid–Ask Spread
Author(s) -
McInish Thomas H.,
Van Ness Bonnie F.
Publication year - 2002
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/1540-6288.00026
Subject(s) - bid–ask spread , econometrics , aggregate (composite) , sample (material) , bass (fish) , economics , financial economics , business , monetary economics , fishery , biology , physics , market liquidity , materials science , composite material , thermodynamics
Using transactions data for a sample of NYSE stocks, we decompose the bid–ask spread (BAS) into order–processing (OP) and asymmetric information (AI) components using the techniques of George, Kaul, and Nimalendran (1991) and Madhavan, Richardson, and Roomans (1997). McInish and Wood (1992) demonstrate that the intraday behavior of BASs can be explained by variables measuring activity, competition, risk, and information. We investigate whether these variables explain the behavior of the OP and AI components of the spread over the trading day. We conclude that, on balance, the variables that determine the aggregate BAS also determine its intraday components.