The authors thank Paul Bennett, Hank Bessembinder, Daisy E. Chung, Kyung Shik Eom, Jing Jiang, Kenneth Kim, Kaunyoung Lee, Jerry Liu, Tim McCormick, Jung S. Shin, Hao Zhang, seminar participants at the KSRI-KAFA Joint Symposium, and session participants at the European Financial Management Association conference and the Financial Management Association conference for valuable comments and suggestions. The authors are solely responsible for the contents of the paper. Financial support from the Social Sciences and Humanities Research Council, Canada is gratefully acknowledged.
Volatility, Market Structure, and the Bid-Ask Spread*
Article first published online: 22 MAR 2010
2009 Korean Securities Association
Asia-Pacific Journal of Financial Studies
Volume 38, Issue 1, pages 67–107, February 2009
How to Cite
Chung, K. H. and Kim, Y. (2009), Volatility, Market Structure, and the Bid-Ask Spread. Asia-Pacific Journal of Financial Studies, 38: 67–107. doi: 10.1111/j.2041-6156.2009.tb00008.x
- Issue published online: 22 MAR 2010
- Article first published online: 22 MAR 2010
- Market Structure;
- Bid-ask Spreads;
- Fair and Orderly markets
We test the conjecture that the specialist system on the New York Stock Exchange (NYSE) provides better liquidity services than the NASDAQ dealer market in times of high return volatility when adverse selection and inventory risks are high. We motivate our conjecture from the observation that there is a designated specialist for each stock on the NYSE who is directly responsible for maintaining a reasonable level of liquidity (i.e., the bid-ask spread) as the ‘liquidity provider of last resort’ whereas there is no such designated dealer on NASDAQ. Empirical evidence is consistent with our conjecture. In a similar vein, we show that the specialist system provides better liquidity than the dealer market in thin markets.