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The Volatility of Bid-Ask Spreads

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  • Benjamin M. Blau
  • Ryan J. Whitby

Abstract

type="main"> This study tests whether the volatility of bid-ask spreads is positively related to expected returns. After controlling for market-risk factors, we find that the average risk-adjusted excess return for stocks in the highest spread volatility quintile is around 50 basis points per month. In a variety of multivariate tests, we find robust evidence of a return premium associated with spread volatility that is both statistically significant and economically meaningful. Our results are robust to controls for a variety of stock characteristics, different tick-size regimes, and other measures of liquidity volatility.

Suggested Citation

  • Benjamin M. Blau & Ryan J. Whitby, 2015. "The Volatility of Bid-Ask Spreads," Financial Management, Financial Management Association International, vol. 44(4), pages 851-874, October.
    • Handle: RePEc:bla:finmgt:v:44:y:2015:i:4:p:851-874
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    File URL: http://hdl.handle.net/10.1111/fima.12092
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