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THE DEALER AND MARKET CONCEPTS OF BID‐ASK SPREAD: A COMPARISON FOR NASDAQ STOCKS
Author(s) -
Hamilton James L.
Publication year - 1991
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1991.tb00651.x
Subject(s) - immediacy , bid price , ask price , econometrics , sample (material) , economics , financial economics , bid–ask spread , competition (biology) , business , monetary economics , market liquidity , finance , ecology , philosophy , chemistry , epistemology , chromatography , biology
Two models of bid‐ask spread are estimated with a unique sample of matched observations of dealer spreads and market (inside) spreads for NASDAQ stocks. The estimates demonstrate that dealer and market spreads relate differently to their common determinants, indicating that the two measures are not interchangeable. Consequently, studies must select the spread concept that is appropriate to the hypothesis being tested to get unbiased estimates and correct interpretations of model parameters. In particular, the cost of immediacy to investors is measured directly by market spreads, while market‐making costs and interdealer competition relate directly to dealer spreads.