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Specialist Risk Attitudes and the Bid‐Ask Spread
Author(s) -
Prucyk Brian
Publication year - 2005
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/j.1540-6288.2005.00101.x
Subject(s) - volatility (finance) , bid–ask spread , ask price , stock (firearms) , econometrics , economics , financial economics , business , stock exchange , finance , geography , archaeology
Abstract This paper examines the relation between the bid‐ask spread and the risk of the underlying stock. It provides evidence that the specialist is not only sensitive to the absolute level of volatility, but also to changes in the level of volatility. This sensitivity arises because of increased inventory risk for the specialist when volatility is changing. For the sample of very liquid stocks in this paper, the quoted spread and the inventory cost component of the spread are shown to increase significantly during trading periods when volatility is both increasing and decreasing.