Date of Award
Master of Science (MS)
Economics and Finance
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.
Williams, Seth E., "Decimalization and Illiquidity Premiums: An Extended Analysis" (2015). All Graduate Plan B and other Reports. 645.