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The components of the bid-ask spread in a limit-order market: Evidence from the Tokyo Stock Exchange

Authors
Ahn H.-J.Cai J.Hamao Y.Ho R.Y.K.
Issue Date
Nov-2002
Keywords
Adverse selection cost; Bid-ask spread; Order-processing cost; Trade Size
Citation
Journal of Empirical Finance, v.9, no.4, pp.399 - 430
Journal Title
Journal of Empirical Finance
Volume
9
Number
4
Start Page
399
End Page
430
URI
https://scholarworks.sookmyung.ac.kr/handle/2020.sw.sookmyung/16609
DOI
10.1016/S0927-5398(02)00003-8
ISSN
0927-5398
Abstract
This paper analyzes the components of the bid-ask spread in the limit-order book of the Tokyo Stock Exchange (TSE). While the behavior of spread components in U.S. markets has been extensively studied, little is known about the spread components in a pure limit-order market. We find that both the adverse selection and order handling cost components of the TSE exhibit U-shape patterns independently, in contrast to the findings of Madhavan et al. [Rev. Financ. Stud. 10 (1997) 1035] for U.S. stocks. On the TSE, there does not exist an upstairs market that allows large trades to be prenegotiated or certified as on the New York Stock Exchange (NYSE). This feature of the TSE provides a valuable opportunity to examine the relationship between trade size and spread components. Our results show that the adverse selection cost increases with trade size while order handling cost decreases with it. © 2002 Elsevier Science B.V. All rights reserved.
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