A Comparison of Alternative Spread Decomposition Models on Euronext Brussels

43 Pages Posted: 1 Aug 2003

See all articles by Rudy De Winne

Rudy De Winne

UCLouvain

Christophe Majois

Financial Services and Markets Authority (FSMA)

Date Written: June 2004

Abstract

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

De Winne, Rudy and Majois, Christophe, A Comparison of Alternative Spread Decomposition Models on Euronext Brussels (June 2004). Available at SSRN: https://ssrn.com/abstract=421240 or http://dx.doi.org/10.2139/ssrn.421240

Rudy De Winne

UCLouvain ( email )

Chaussée de Binche, 151
Mons, 7000
Belgium
+3265323334 (Phone)

Christophe Majois (Contact Author)

Financial Services and Markets Authority (FSMA) ( email )

Rue du Congrès/Congresstraat 12-14
Brussels, 1000
Belgium
+32 2 220 58 46 (Phone)

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