The Bid-Ask Spread in the Danish Stock Market: Evidence from the 1990s

International Journal of Economics and Finance, Vol. 8, No 9 (2016)

Posted: 2 Apr 2008 Last revised: 20 May 2018

See all articles by Torben Voetmann

Torben Voetmann

The Brattle Group; University of San Francisco

Date Written: July 2, 2016

Abstract

This paper investigates the cost components of bid-ask spreads around earnings announcements on the small Danish stock market in the 1990s. The results indicate that negative earnings surprises convey pricing information, suggesting the existence of significant information asymmetry between market makers and informed traders. Negative earnings surprises resulted in an increase in adverse-selection cost and trading volume while inventory-holding and order-processing costs decreased, leading to a combined decrease in the realized spread. The change in the realized spread is significant, while the change in the quoted bid-ask spread is negligible. Overall, the results suggest that informed traders’ ability to assess firms’ performance in the Danish stock market affects the bid-ask spread around announcements of earnings. The observed changes in cost components on the small Danish stock market are similar to those observed in larger and more active capital markets.

Keywords: Bid-ask spread; Earnings surprises; Asymmetric information; Order-processing costs; Inventory costs

JEL Classification: G14

Suggested Citation

Voetmann, Torben, The Bid-Ask Spread in the Danish Stock Market: Evidence from the 1990s (July 2, 2016). International Journal of Economics and Finance, Vol. 8, No 9 (2016). Available at SSRN: https://ssrn.com/abstract=1115042 or http://dx.doi.org/10.2139/ssrn.1115042

Torben Voetmann (Contact Author)

The Brattle Group ( email )

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HOME PAGE: http://www.brattle.com

University of San Francisco ( email )

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