Asymmetric information modelling in the realized spread: A new simple estimation of the informed realized Spread

Abstract

The market liquidity plays an authoritative role in the execution of financial transaction. Since the liquidity has immediate impact on the trading, the liquidity risk has been gaining a huge attention in the asset pricing, corporate financing, and risk portfolio management. The bid-ask spread is often reported a significant indicator of the market liquidity and its associated cost in the financial market. This work proposes a new estimation of the bid-ask spread, namely the Informed Realized Spread (IRS). The IRS method is a modified version of the Realized Spread (RS), which exclusively illustrates the asymmetric information effects on the spread size. Despite differences behind the construction of spread proxies, the IRS model is found to be positive and strongly correlated with the RS model. The IRS method is straightforward, computationally less-intensive, and suitable for variety of research in the asset pricing studies.