Estimating the profit markup component of the Bid-ask Spread: evidence from the London Stock Exchange

Levin, E.J. and Wright, R.E. (2004) Estimating the profit markup component of the Bid-ask Spread: evidence from the London Stock Exchange. Quarterly Review of Economics and Finance, 44(1), pp. 1-19. (doi: 10.1016/S1062-9769(03)00005-X)

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Abstract

In this paper the theoretical profit-maximising bid-ask spread, based in economic theory, is related to the excess demand curve (i.e., the difference between the slopes of the demand and supply curves), market concentration, and the degree of collusion. Empirical estimates of the slopes of the excess demand curves are substituted into this economic relationship in order to calculate the excess profit component of the bid-ask spread for all Financial Times-Stock Exchange 100-Share Index (FTSE100) stocks traded on the London Stock Exchange (LSE) in the period 1 August 1994 and 31 July 1995. The excess profit component in a Cournot–Nash equilibrium represents 11% of the observed bid-ask spread on average.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Wright, Dr Robert and Levin, Dr Eric
Authors: Levin, E.J., and Wright, R.E.
College/School:College of Social Sciences > School of Social and Political Sciences > Urban Studies
Journal Name:Quarterly Review of Economics and Finance
ISSN:1062-9769
Published Online:09 November 2012

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