Date of Award

2015

Degree Type

Report

Degree Name

Master of Science (MS)

Department

Economics and Finance

First Advisor

Tyler Brough

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.

Included in

Finance Commons

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