Abstract

http://ssrn.com/abstract=465583
 
 

References (34)



 
 

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What Explains the Bid-Ask Spread Decline after Nasdaq Reforms?


Yan He


Indiana University Southeast - School of Business

Chunchi Wu


Universtity at Buffalo


Financial Markets, Institutions & Instruments, Vol. 12, pp. 347-376, December 2003

Abstract:     
This paper examines whether the decrease in bid-ask spreads on Nasdaq after the 1997 reforms is due to a decrease in market-making costs and/or an increase in market competition for order flows. Unlike previous studies, we jointly examine how competition and trading costs affect bid-ask spreads. In addition, we separate the effects of informed trading and liquidity costs on bid-ask spreads. Informed trading cost is directly estimated for each Nasdaq stock using a Bayesian theoretic model. Empirical results show that market-making costs and competition significantly affect bid-ask spreads. The post-reform decrease in bid-ask spreads is largely due to both an increase in competition and a decrease in informed trading and liquidity costs on Nasdaq.

Number of Pages in PDF File: 30

Accepted Paper Series


Date posted: November 26, 2003  

Suggested Citation

He, Yan and Wu, Chunchi, What Explains the Bid-Ask Spread Decline after Nasdaq Reforms?. Financial Markets, Institutions & Instruments, Vol. 12, pp. 347-376, December 2003. Available at SSRN: http://ssrn.com/abstract=465583

Contact Information

Yan He (Contact Author)
Indiana University Southeast - School of Business ( email )
4201 Grant Line Road
New Albany, IN 47150
United States
812-941-2308 (Phone)
812-941-2672 (Fax)
Chunchi Wu
Universtity at Buffalo ( email )
School of Management
335A Jacobs Management Center
Buffalo, NY 14260
United States
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