Information Effects on the Bid-Ask Spread Export

@article{citeulike:3320450, abstract = {An individual who chooses to serve as a market-maker is assumed to optimize his position by setting a bid-ask spread which maximizes the difference between expected revenues received from liquidity-motivated traders and expected losses to information-motivated traders. By characterizing the cost of supplying quotes, as writing a put and a call option to an information-motivated trader, it is shown that the bid-ask spread is a positive function of the price level and return variance, a negative function of measures of market activity, depth, and continuity, and negatively correlated with the degree of competition. Thus, the theory of information effects on the bid-ask spread proposed in this paper is consistent with the empirical literature.}, author = {Copeland, Thomas E. and Galai, Dan}, citeulike-article-id = {3320450}, citeulike-linkout-0 = {http://dx.doi.org/10.2307/2327580}, citeulike-linkout-1 = {http://www.jstor.org/stable/2327580}, doi = {10.2307/2327580}, issn = {00221082}, journal = {The Journal of Finance}, keywords = {asked, bid, call, dealers, insider-trading, models, options, price, put, securities, spread, studies, trading}, number = {5}, pages = {1457--1469}, posted-at = {2008-09-23 11:10:15}, priority = {2}, publisher = {Blackwell Publishing for the American Finance Association}, title = {Information Effects on the Bid-Ask Spread}, url = {http://dx.doi.org/10.2307/2327580}, volume = {38}, year = {1983} }

TY - JOUR ID - citeulike:3320450 L3 - citeulike-article-id:3320450 N2 - An individual who chooses to serve as a market-maker is assumed to optimize his position by setting a bid-ask spread which maximizes the difference between expected revenues received from liquidity-motivated traders and expected losses to information-motivated traders. By characterizing the cost of supplying quotes, as writing a put and a call option to an information-motivated trader, it is shown that the bid-ask spread is a positive function of the price level and return variance, a negative function of measures of market activity, depth, and continuity, and negatively correlated with the degree of competition. Thus, the theory of information effects on the bid-ask spread proposed in this paper is consistent with the empirical literature. IS - 5 JF - The Journal of Finance SN - 00221082 EP - 1469 TI - Information Effects on the Bid-Ask Spread PB - Blackwell Publishing for the American Finance Association VL - 38 SP - 1457 KW - asked KW - bid KW - call KW - dealers KW - insider-trading KW - models KW - options KW - price KW - put KW - securities KW - spread KW - studies KW - trading AU - Copeland, Thomas AU - Galai, Dan PY - 1983/// UR - http://dx.doi.org/10.2307/2327580 ER -