"Bid, Ask, and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders"
©
Journal of Financial Economics,
March
1985
Volume: 14
|
Issue: 1
|
Pages: 71-100
Publication type: Journal article
Research Archive Topic: Capital Markets and Investments, Corporate Finance
Abstract
The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits. The resulting transaction prices convey information, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity. The serial correlation of transaction price differences is a function of the proportion of the spread due to adverse selection. A bid-ask spread implies a divergence between observed returns and realizable returns. Observed returns are approximately realizable returns plus what the uninformed anticipate losing to the insiders.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.