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A comparison of alternative spread décomposition models on Euronext Brussels

par De Winne, Rudy;Majois, Christophe
Référence Brussels economic review, 46, 4, page (91-136)
Publication Publié, 2003

Article révisé par les pairs

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Résumé :

This paper checks the relevance of alternative spread decomposition models in an order-driven environment. Using intraday data from Euronext Brussels, we compute estimates of the bid-ask spread components provided by eight models. Our results support the hypothesis of no inventory holding costs in order-driven markets. Focusing on adverse selection component, we find high correlation across five models assuming no inventory holding cost. In order to assess the reliability of the "best" models, i.e., Huang & Stoll's (1997) 2-way decomposition, Madhavan et al.'s (1997) method and Lin et al.'s (1995) procedure, we compare their adverse selection cost estimates with five information asymmetry proxies. However, results on that point do not allow us to draw definitive conclusions.