A Comparison of Alternative Spread Decomposition Models on Euronext Brussels
43 Pages Posted: 1 Aug 2003
Date Written: June 2004
This paper checks the relevance of alternative spread decomposition models in an order-driven environment. Using intraday data from Euronext Brussels, we compute estimates of the bid-ask spread components provided by eight models. Our results support the hypothesis of no inventory holding costs in order-driven markets. Focusing on adverse selection component, we find high correlation across five models assuming no inventory holding cost. In order to assess the reliability of the best models, i.e., Huang & Stoll's (1997) 2-way decomposition, Madhavan et al.'s (1997) method and Lin95a et al.'s (1995) procedure, we compare their adverse selection cost estimates with five information asymmetry proxies. However, results on that point do not allow us to draw definitive conclusions.
Keywords: Market Microstructure, Bid-Ask Spread Components, Order-Driven Markets, Information Asymmetry, Inventory Holding Costs
JEL Classification: G14, G10
Suggested Citation: Suggested Citation