Continuations, Reversals, and Adverse Selection on the NASDAQ and Nyse/Amex

Posted: 3 Nov 1998

See all articles by Charles M. Jones

Charles M. Jones

Columbia Business School

Marc L. Lipson

University of Virginia - Darden School of Business

Date Written: March 1995

Abstract

We show that estimates of adverse selection in the bid-ask spread obtained using methodologies based on Glosten (1987) can be expressed as a weighted average of adverse selection calculated using continuations (successive trades in the same direction) and reversals (successive trades in opposite directions). For example, the methodology of George, Kaul, and Nimalendran (1991) uses only reversals to assess the degree of adverse selection. Most importantly, though NASDAQ firms exhibit the same degree of adverse selection in both reversals and continuations, adverse selection based on reversals far exceeds that based on continuations for NYSE/AMEX firms. These results suggest that reversals and continuations are fundamentally different and the difference is related to market structure. Finally, we argue that continuation based measures of price responsiveness are a natural measure of an important cost of accumulating a position over time. Using such a measure, we find that the NASDAQ market is deeper for a sample of firms which switched between the NASDAQ and the NYSE/AMEX.

JEL Classification: G10

Suggested Citation

Jones, Charles M. and Lipson, Marc Lars, Continuations, Reversals, and Adverse Selection on the NASDAQ and Nyse/Amex (March 1995 ). Available at SSRN: https://ssrn.com/abstract=6258

Charles M. Jones

Columbia Business School ( email )

3022 Broadway
Uris Hall Rm 101
New York, NY 10027
United States
(212) 854-4109 (Phone)

HOME PAGE: http://https://www8.gsb.columbia.edu/cbs-directory/detail/cj88

Marc Lars Lipson (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4837 (Phone)
434-243-5021 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lipson.htm

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