Detecting Abnormal Bid-Ask Spread: A Comparison of Event Study Methods

Detecting Abnormal Bid-Ask Spread: A Comparison of Event Study Methods This study examines empirical issues associated with the use of bid-ask spreads in event studies. The simulation results indicate that the distribution of average standardized abnormal spread shows little deviation from normality. Simulation results also indicate that the widely used percent spread metric results in test statistics with low power. In contrast, use of a standardized raw spread metric and a simple mean-adjusted expectation model results in well specified and reasonably powerful Patell and Brown-Warner type test statistics. As the abnormal spread series is characterized by high first order serial correlation, it is important to adjust for this serial correlation when using multi-day event windows. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Detecting Abnormal Bid-Ask Spread: A Comparison of Event Study Methods

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2000 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008328107489
Publisher site
See Article on Publisher Site

Abstract

This study examines empirical issues associated with the use of bid-ask spreads in event studies. The simulation results indicate that the distribution of average standardized abnormal spread shows little deviation from normality. Simulation results also indicate that the widely used percent spread metric results in test statistics with low power. In contrast, use of a standardized raw spread metric and a simple mean-adjusted expectation model results in well specified and reasonably powerful Patell and Brown-Warner type test statistics. As the abnormal spread series is characterized by high first order serial correlation, it is important to adjust for this serial correlation when using multi-day event windows.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 8, 2004

References

  • Bid-ask Spread Components Around Anticipated Announcements
    Brooks, R.
  • Measuring Security Price Performance
    Brown, S.J.; Warner, J.B.
  • The Effects of Stock Splits on Bid-Ask Spreads
    Conroy, R.M.; Harris, R.S.; Benet, B.A.
  • Information Effects on the Bid-Ask Spread
    Copeland, T.E.; Galai, D.
  • Optimal Release of Information by Firms
    Diamond, D.
  • Informed Trading Risk and Bid-ask Spread Changes Around Open Market Stock Repurchases in the NASDAQ Market
    Franz, D.; Rao, R.; Tripathy, N.
  • Auditor Change Announcements and Dispersion of Investor Expectations
    Hagigi, M.; Kluger, B.; Shields, D.

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