4.While thespreads in thetradedcommoditymarkets are
similartothoseinthefinancialassetmarkets,thespreadsin
other real asset markets tend to be much larger.
Determinants of the Bid-Ask Spread
A number of studies have looked at the variables that
determine(or, atthevery least,correlate with)thebid-ask
spread. Studies
6 findthatthespreadasapercentageofthepriceiscorrelated
negativelywiththepricelevel,thevolume,andthenumberof
marketmakers,andpositivelywithvolatility.Eachofthese
findingsisconsistentwiththetheoryonthebid-askspread.
Thenegativecorrelationwithpricelevelcanbeexplainedby
thehigherprocessingcostasapercentageoftheprice.Higher
volume reduces the need for market makers to maintain
inventoryandalsoallowsthemtoturn overtheirinventory
rapidly, resulting in lower inventory costs. The higher
volatilityleadstohigherbid-askspreadspartlybecausethe
adverseselectionproblemisgreaterformorevolatilestocks;
there will generally be more informed traders, a greater
informationdifferential,andgreateruncertaintyaboutfuture
information on these stocks. It is also worth noting that
variablessuchaspricelevel,volatilityandtradingvolumenot
only arecorrelatedwitheach other,but also arecorrelated
with other variables such as firm size.
Thestudyquotedintheprevioussubsection,byKothareand
Laux,thatlookedataveragespreadsontheNASDAQalso
lookedatdifferencesinbid-askspreadsacrossstocksonthe
NASDAQ.Inadditiontonotingsimilarcorrelationsbetween
the bid-ask spreads, price level, and trading volume, they
uncoveredaninterestingnewvariable.Theyfoundthatstocks