Asset pricing and the bid-ask spread

Abstract This paper studies the effect of the bid-ask spread on asset pricing. We analyze a model in which investors with different expected holding periods trade assets with different relative spreads. The resulting testable hypothesis is that market-observed expexted return is an increasing and concave function of the spread. We test this hypothesis, and the empirical results are consistent with the predictions of the model.

Asset pricing and bid-ask spread

Market efficiency, long-term returns, and behavioral finance1The comments of Brad Barber, David Hirshleifer, S.P. Kothari, Owen Lamont, Mark Mitchell, Hersh Shefrin, Robert Shiller, Rex Sinquefield, Richard Thaler, Theo Vermaelen, Robert Vishny, Ivo Welch, and a referee have been helpful. Kenneth French and Jay Ritter get special thanks.1

This paper provides an analysis of the predictable components of monthly common stock and bond portfolio returns. Most of the predictability is associated with sensitivity to economic variables in ...

https://www.jstor.org/stable/pdfplus/2937686.pdf

The variation of economic risk premiums

http://people.stern.nyu.edu/lpederse/courses/LAP/papers/InventoryRisk/AmihudMendelson80.pdf

Dealership market: Market-making with inventory☆

Risk and return

A popular hypothesis to explain the anomalous January returns of common stocks is based on the argument that there is considerable tax-loss selling by investors toward the end of the year. The purpose of this study is to test the tax-loss-selling hypothesis with data on Canadian stocks. Although the introduction of capital gains tax in Canada seems to have affected the behavior of stock returns, the findings do not support the proposition that taxinduced trading is the sole cause ofthe seasonality in stock returns in Canada. I. Introduction Over the past several years, a number of studies have shown that the returns on common stocks, in general, and the stocks of small companies, in particular, tend to be abnormally high during the month of January. Keim [10] demonstrated quite clearly that a very high percentage of the abnormal positive returns gener? ated on stocks with low market capitalizations occurs during January, with the returns during the first five trading days of the year accounting for most of the anomalous behavior. His results were recently confirmed by Roll [14], who re? ported that around 37 percent of the annual differences in the returns on the equally-weighted and value-weighted indices of NYSE and AMEX stocks is ac? counted for by what happens in the five trading days from the last trading day in December through the fourth trading day in January. A popular hypothesis to explain the so-called "January effect" in stock re? turns is based on the argument that there is considerable end of the year tax-lossselling by investors. Originally proposed by Wachtel [19], it asserts that inves? tors try to realize losses towards the end of the year to reduce their taxes, thereby putting downward pressure on stock prices. According to the hypothesis, once

Seasonality in Canadian Stock Prices: A Test of the "Tax-Loss-Selling" Hypothesis

The economics of the stock market

This article presents an economic analysis of the long-standing policy of charging minimum commissions on stock exchange transactions. The discussion draws heavily on the arguments put forward by the NYSE as a part of its recent ongoing defense of fixed commissions. These arguments fall into two categories: (1) those related to the structure of the continuous auction method, or market-making, employed by the Exchange, and (2) those related to the structure of the brokerage industry. According to the Exchange's logic, the elimination of minimum commissions would lead to a splintering of the auction market and to an increase in the concentration in the brokerage business. The analysis presented in this article leads to the conclusion that the Exchange's case is faulty in terms of both its theory and its empirical findings. It further concludes that the viability of the auction market would be somewhat improved by permitting commissions to be set on the basis of competition. In short, this article argues that minimum commission rates on stock exchange transactions cannot be justified on economic grounds but rather represent a form of monopolistic price-fixing.

Seha M. Tinic

Papers

Risk and return

Seasonality in Canadian Stock Prices: A Test of the "Tax-Loss-Selling" Hypothesis

The economics of the stock market

Minimum Commission Rates on New York Stock Exchange Transactions