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Information Asymmetry and the Bid‐Ask Spread: Evidence From the UK
Author(s) -
Gregoriou Andros,
Ioannidis Christos,
Skerratt Len
Publication year - 2005
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.0306-686x.2005.00648.x
Subject(s) - bid price , ask price , economics , bid–ask spread , proxy (statistics) , financial economics , volatility (finance) , information asymmetry , empirical evidence , econometrics , market liquidity , actuarial science , business , monetary economics , finance , philosophy , epistemology , machine learning , computer science
The generally accepted factors that determine the bid‐ask spread are volatility, trading volume and market value (Atkins and Dyl, 1997; Glosten and Harris, 1988; and Menyah and Paudyal, 2000). Following Kim and Verrecchia (1994) we include a measure of the disagreement in analysts’ earnings forecasts in our model of the bid ask spread. This measure serves as a proxy for the informational disadvantage of market makers with respect to informed traders. Market makers respond to the additional risk by increasing the bid‐ask spread. We find that the disagreement amongst analysts is significant for horizons up to and including six months (and with the hypothesised sign) in explaining FTSE 100 company spreads, rendering strong empirical support for our model.