Date of Award
5-2015
Degree Type
Report
Degree Name
Master of Science (MS)
Department
Economics and Finance
Committee Chair(s)
Tyler Brough
Committee
Tyler Brough
Committee
Ben Blau
Committee
Ryan Whitby
Abstract
In this study I compare the illiquidity premium related to the bid–ask spread before and after the 2001 change to decimal pricing for New York Stock Exchange (NYSE) and Nasdaq stock exchanges. Theory predicts a contraction of the bid-ask spread with a move to more precise pricing, and this association is shown. A disparity between the NYSE and Nasdaq exchanges due to decimalization is shown. A portfolio analysis based on the relationship between the bid-ask spread and next month returns is back-tested, revealing a significant and positive risk-adjusted return for holding the portfolio of stocks with the highest bid-ask spreads. In this portfolio analysis the efficient market hypothesis does not hold.
Recommended Citation
Williams, Seth E., "Decimalization and Illiquidity Premiums: An Extended Analysis" (2015). All Graduate Plan B and other Reports, Spring 1920 to Spring 2023. 645.
https://digitalcommons.usu.edu/gradreports/645
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