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Is the Adverse Selection Component Really Higher on the NYSE/Amex than on the Nasdaq?

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  • Bonnie F. Van Ness
  • Robert A. Van Ness
  • Richard S. Warr

Abstract

Affleck–Graves, Hegde and Miller (1994) find that the adverse selection component of the bid–ask spread is higher for NYSE and Amex stocks than for Nasdaq stocks. Using the model of Huang and Stoll (1997), we revisit their study and find the opposite to be true – the adverse selection component is actually higher for Nasdaq stocks than for NYSE and Amex stocks. The economic magnitude of this additional adverse selection cost is very significant. Our results have important implications for the understanding of information production in dealer versus auction markets, and the costs of trading on such markets.

Suggested Citation

  • Bonnie F. Van Ness & Robert A. Van Ness & Richard S. Warr, 2002. "Is the Adverse Selection Component Really Higher on the NYSE/Amex than on the Nasdaq?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(5‐6), pages 807-824.
    • Handle: RePEc:bla:jbfnac:v:29:y:2002:i:5-6:p:807-824
    DOI: 10.1111/1468-5957.00451
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    Cited by:

    1. Chung, Huimin & Sheu, Her-Jiun & Wang, Juo-Lien, 2009. "Do firms' earnings management practices affect their equity liquidity?," Finance Research Letters, Elsevier, vol. 6(3), pages 152-158, September.
    2. Charoenwong, Charlie & Ding, David K. & Siraprapasiri, Vasan, 2011. "Adverse selection and corporate governance," International Review of Economics & Finance, Elsevier, vol. 20(3), pages 406-420, June.
    3. Bill Hu & Joon Ho Hwang & Christine Jiang, 2014. "The Impact of Earnings Guidance Cessation on Information Asymmetry," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(1-2), pages 73-99, January.
    4. Nimalendran, M. & Petrella, Giovanni, 2003. "Do 'thinly-traded' stocks benefit from specialist intervention?," Journal of Banking & Finance, Elsevier, vol. 27(9), pages 1823-1854, September.
    5. Frank McGroarty & Owain ap Gwilym & Stephen Thomas, 2007. "The Components of Electronic Inter‐Dealer Spot FX Bid‐Ask Spreads," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(9‐10), pages 1635-1650, November.

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