A Comparison of Alternative Spread Decomposition Models on Euronext Brussels
(2003) 20th International AFFI Conference — Location: Lyon, France
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- Authors
- Abstract
- (en) This paper compares several spread decomposition models and provides estimations of the bid-ask spread components using intraday data for the BEL20 index stocks traded on Euronext Brussels. We find that models considering an inventory holding component do not provide consistent estimates; we view this result as a support of our hypothesis about the absence of inventory management by liquidity suppliers in order-driven markets. Among the five models focusing on adverse selection and order processing costs, four of them produce adverse selection estimates that are highly correlated. When focusing on results provided by Huang & Stoll's (1997) 2-way decomposition and Lin et al.'s (1995) procedure, we do not find expected relationships between adverse selection estimates and various information asymmetry proxies we derived from the rebuilt order book. Even if these mixed results may originate from a bad selection of information asymmetry proxies, we however cast some doubts on the ability of spread decomposition models to really measure information asymmetry.
- Affiliations
Louvain School of Management Accounting & Finance
Citations
Majois, C., & De Winne, R. (2003). A Comparison of Alternative Spread Decomposition Models on Euronext Brussels. 20th International AFFI Conference, Lyon, France. https://hdl.handle.net/2078.5/79310