How Important is Informed Trading for the Bid-Ask Spread? Evidence from an Emerging Market

CERGE-EI Working Paper No. 168

Posted: 13 Aug 2001

See all articles by Jan Hanousek

Jan Hanousek

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute); Charles University in Prague; Academy of Sciences of the Czech Republic; Centre for Economic Policy Research (CEPR)

Richard Podpiera

International Monetary Fund (IMF); Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2000

Abstract

The link between informed trading and the bid-ask spread has been the focus of abundant literature and some authors feared that a large amount of informed trading might lead to shutdown of markets. We explore this issue using data from the Czech Republic. Our estimates confirm that the share of informed trading and its variability is indeed high relative to developed markets, however, share of the adverse selection component is only 14% of the spread. Since the Czech Republic has been known in the financial community as being plagued by informed trading, our findings suggest that the relative importance of adverse selection as a determinant of the spread is generally low across markets.

Keywords: Market microstructure, informed trading, bid-ask spread, adverse selection

JEL Classification: G14, G15

Suggested Citation

Hanousek, Jan and Podpiera, Richard, How Important is Informed Trading for the Bid-Ask Spread? Evidence from an Emerging Market (December 2000). CERGE-EI Working Paper No. 168. Available at SSRN: https://ssrn.com/abstract=264541

Jan Hanousek (Contact Author)

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

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Charles University in Prague ( email )

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Academy of Sciences of the Czech Republic ( email )

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Richard Podpiera

International Monetary Fund (IMF) ( email )

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Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

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