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The Volatility of Bid‐Ask Spreads
Author(s) -
Blau Benjamin M.,
Whitby Ryan J.
Publication year - 2015
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12092
Subject(s) - volatility (finance) , bid price , economics , econometrics , financial economics , market liquidity , stock (firearms) , bid–ask spread , volatility risk premium , risk premium , implied volatility , monetary economics , finance , geography , archaeology
This study tests whether the volatility of bid‐ask spreads is positively related to expected returns. After controlling for market‐risk factors, we find that the average risk‐adjusted excess return for stocks in the highest spread volatility quintile is around 50 basis points per month. In a variety of multivariate tests, we find robust evidence of a return premium associated with spread volatility that is both statistically significant and economically meaningful. Our results are robust to controls for a variety of stock characteristics, different tick‐size regimes, and other measures of liquidity volatility.