Corwin-Schultz Bid-ask Spread Estimator in the Brazilian Stock Market

Abstract

This paper tests the validity of the Corwin-Schultz bid-ask spread estimator in the Brazilian stock market. The Corwin-Schultz estimator arises as an easy way to compute asymmetric information throughout daily high and low stock prices for estimating overnight and non-negative adjusted spreads. The sample consisted of Ibovespa firms from 1986 to 2014 and was analysed with time series econometrics. The findings show that the measures of spread have stationarity properties, allowing for forecasting in a period of lagged variables, besides having the property of time-varying cointegration with market-to-book ratio, debt on equity, size and return and also presenting sensibility to different periods, industries and listing segments. Thus, the Corwin-Schultz bid-ask spread estimator seems to be a valid and reliable measure for forecasting aggregate-data variables through the weighted average of firm-level variables.

Asymmetric information and daily stock prices in Brazil

“…The main objective of this study is to verify whether the relationship between asymmetric information and stock prices, on a daily basis, is identical to that observed for quarterly periods (Ripamonti, 2016). As previously emphasized, daily periods may be more volatile.…”

“…It is possible to verify a "social difference" within national companies wherein agency theory applies, and inside traders have advance information as to the company's purchase of assets. According to Ripamonti (2016), informed traders position themselves strategically in negotiations, and therefore have a privileged position over uninformed traders, resulting in disillusionment with the stock market. Thus, the asymmetry of information may be the source of the market's inefficiency.…”

“…The Brazilian stock market is relatively new, and has undergone reforms aimed at increasing transparency of information and investor protection in the last 20 years. The asymmetry measure used in this study has been validated for quarterly periods (Ripamonti, 2016) in that market. However, considering the volatility of developing markets, there seems to be a need to confirm the validity results for shorter periods, more relevant to a very active trading environment.…”

A comprehensive study on bid-ask spread and its determinants in India

“…The authors find a weak relation of volatility with both volume and spread and conclude that the Indian market is informationally inefficient. Ripamonti (2016), in studying the emerging market of Brazil, finds a relation between the asymmetric information measure of spread and variables such as the market-to-book ratio, debt on equity, size, and return. In the Chinese futures commodity market, Liu et al (2016) find a positive relationship between bid-ask spreads and volatility and a negative relation with trading volume.…”

Capital Structure Adjustments and Asymmetric Information

“…They also derived their measure into a non-negative and overnight adjusted spread. The measures have been tested in abnormal returns, tangible economic gains and emerging markets, and for their consistency and financial reporting quality (Maskara & Mullineaux, 2011;Karstanje, Sojli, Tham, & Van Der Wel, 2013;Lin, 2014;Zhang, Yang, Su, & Zhang, 2014;Cerqueira & Pereira, 2014;Ripamonti, 2016).…”