The accuracy of spread decomposition models in capturing informed trades

Purpose The purpose of this paper is to examine the empirical relationship between trades undertaken by informed agents (managers) and the proxies for informed trades computed by bid-ask spread decomposition models. Design/methodology/approach An econometric application of spread decomposition models to data from the London Stock Exchange, with an examination of whether the model predictions are co-integrated with actual outcomes. Findings The authors find overwhelming evidence of non-stationary behaviour between the actual and predicted informed trade prices. The findings suggest that there is a clear need for an alternative to extant spread decomposition models perhaps incorporating findings from behavioural finance. Originality/value Given the importance of stock market liquidity and the extensive use of spread decomposition models in predicting informed trades, the authors believe that the research conducted in the paper is an important contribution to the market microstructure literature.

Bid-Ask Spread Decomposition and Information Asymmetry of Firms Cross-Listed in the London and New York Exchanges

This paper compares the effective bid-ask spread and examines the decomposition of spread in the London Stock Exchange (LSE) and New York Stock Exchange (NYSE). Results indicate that order persistence cost is generally higher in NYSE than in LSE while order processing cost in NYSE is lower, and higher proportion of the bid-ask spread is directly related to the information inefficiency in LSE.