Informed Trading and the Bid-Ask Spread: Evidence from an Emerging Market
Posted: 18 Oct 2003
The bid-ask spread affects significantly the performance of financial markets. We explore the impact of informed trading on the composition of the bid-ask spread in high frequency data from the Czech equity market, which has been plagued by informed trading due to insufficient regulation and missing institutions. Our estimates suggest that the Czech market-maker based trading system is rather efficient in dealing with informed trading. Only 17% of the bid-ask spread is explained by informed trading, which corresponds roughly to the share of the adverse-selection component in developed markets. An explanation based on the difference between the posted and traded spreads is offered.
Keywords: Market microstructure, Bid-ask spread, Informed trading, Emerging markets
JEL Classification: G14, G15, P34, P59
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