Journal of Financial Economics Vol. 14 No. 1 1985
Bid, ask and transaction prices in a specialist market with heterogeneously informed traders
Abstract
The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits. The resulting transaction prices convey information, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity. The serial correlation of transaction price differences is a function of the proportion of the spread due to adverse selection. A bid-ask spread implies a divergence between observed returns and realizable returns. Observed returns are approximately realizable returns plus what the uninformed anticipate losing to the insiders.
- DOI
- 10.1016/0304-405x(85)90044-3
- Volume
- 14
- Issue
- 1
- Pages
- 71-100
- Language
- en
- Sources
- crossref bibtex:phds-export.bib openalex