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on Market Microstructure |
| By: | Lucian Tatu (Academy of Economic Studies, Bucharest, Romania); Delia Tatu (Academy of Economic Studies, Bucharest, Romania) |
| Abstract: | An important component of the transaction costs faced by investors in financial securities is the bid-ask spread set by market maker. The goal of this study is to determine the importance of the components of spread (order processing costs, inventory costs and adverse selection costs) using models based on autocovariance derived by Roll(1984), George, Kaul and Nimalendran (1991) and Stoll (1989). Also, we examine the relationship between some stock characteristics (such as daily volume of trading and average stock price) and spread. The data set contains information about Bucharest Stock Exchange (BSE) first tier quoted stocks, for the period 27.11.2006- 19.12.2006.This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, Lisbon, Portugal on May 23, 2008Keywords: bid-ask spread, inventory cost, adverse selection cost, order cost |
| Date: | 2008–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:bep:itfapp:1125&r=mst |
| By: | Patrick Bolton; Tano Santos; Jose A. Scheinkman |
| Abstract: | We consider a model of liquidity demand arising from a possible maturity mismatch between asset revenues and consumption. This liquidity demand can be met with either cash reserves (inside liquidity) or via asset sales for cash (outside liquidity). The question we address is, what determines the mix of inside and outside liquidity in equilibrium? An important source of inefficiency in our model is the presence of asymmetric information about asset values, which increases the longer a liquidity trade is delayed. We establish existence of an immediate-trading equilibrium, in which asset trading occurs in anticipation of a liquidity shock, and sometimes also of a delayed-trading equilibrium, in which assets are traded in response to a liquidity shock. We show that, when it exists, the delayed-trading equilibrium is Pareto superior to the immediate-trading equilibrium, despite the presence of adverse selection. However, the presence of adverse selection may inefficiently accelerate asset liquidation. We also show that the delayed-trading equilibrium features more outside liquidity than the immediate-trading equilibrium although it is supplied in the presence of adverse selection. Finally, long term contracts do not always dominate the market provision of liquidity. |
| JEL: | G2 G21 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14867&r=mst |