Transaction Costs and Liquidity: An Empirical Investigation
Posted: 11 Feb 1998
Date Written: November 18, 1997
We study the effects of changes in bid-ask spreads on the prices and trading volumes of stocks that move from Nasdaq to the NYSE or Amex, and stocks move from Amex to Nasdaq. When stocks move from Nasdaq to an exchange, their spreads typically decrease, but the reduction in spreads is much larger when Nasdaq market makers avoid odd-eighths quotes. When stocks move from Amex to Nasdaq, their spreads typically increase, but again, the increase is much larger when Nasdaq market makers avoid odd eighths. We use this data to isolate the effects of transaction costs on trading volume and expected returns. We find that higher transaction costs (bid-ask spreads) significantly reduce trading volume, but do not have significant effects on prices.
JEL Classification: G12, G14
Suggested Citation: Suggested Citation