The Components of the Bid-Ask Spread: the Case of the Athens Stock Exchange


  • The authors would like to thank an anonymous referee for the instructive suggestions that greatly helped to improve an early version of the paper. We also like to thank seminar participants at the Econometrics of the Microstructure of Financial Markets, Tilburg, 23–24 April 2004, at the Annual Meeting of the European Financial Management Association, Basel, 30 June–3 July 2004, at the 11th Annual Meeting of the Multinational Finance Society, Istanbul, 3–7 July 2004, at the International Conference on Statistical Finance and Financial Engineering, Tokyo, 16 March 2005 and at 12th Annual Meeting of the Multinational Finance Society, Athens, Greece, July 2–7, 2005 for useful comments. The usual disclaimer applies. All errors remain our responsibility. Correspondence: Timotheos Angelidis.


We analyse the components of the bid-ask spread in the Athens Stock Exchange (ASE), which was recently characterised as a developed market. For large and medium capitalisation stocks, we estimate the adverse selection and the order handling component of the spreads as well as the probability of a trade continuation on the same side of either the bid or the ask price, using the Madhavan et al. (1997)model. We extend it by incorporating the traded volume and we find that the adverse selection component exhibits U-shape patterns, while the cost component pattern depends on the stock price. For high priced stocks, the usual U-shape applies, while for low-priced ones, it is an increasing function of time, mainly due to the order handling spread component. Furthermore, the expected price change and the liquidity adjustment to Value-at-Risk that is needed are higher in the low capitalisation stocks, while the most liquid stocks are the high priced ones. Moreover, by estimating the Madhavan et al. (1997)model for two distinct periods we explain why there are differences in the components of the bid-ask spread.