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Comparative Analysis of ETF and Common Stock Intraday Bid-Ask Spread Behavior

Author

Listed:
  • Stoyu Ivanov

    (San José State University)

Abstract
In this study we approach the issue of ETF similarity with common stock with regards to their intraday bid-ask spread behavior. We use 18 stocks and 18 ETFs listed in the US to examine if the well documented in the literature J-shaped pattern of stocks bid-ask spread during the trading day is present in both stocks and ETFs today, which will help us understand better the stock characteristics of ETFs. We find that the factors identified as affecting stocks, activity, risk, information and competition, also influence ETFs but the impact is smaller. We also document elevated bid-ask spreads at the opening of the trading day with the stock spread being higher than ETFs almost twofold. The spreads taper during the day for both ETFs and stocks but increase around closing time for ETFs only, which means that the documented J-shaped pattern is present only in ETFs. This paper extends the work of Chelley-Steeley and Park (2011) who study intraday bid-ask spread behavior for London listed ETFs and of Ascioglu, Aydogdu, Chou and Kugele (2006) who study a sample of ETFs, NYSE and NASDAQ stocks intraday bid-ask spread components. The documented pattern in the prior literature is for NYSE listed stocks, the McInish and Wood (1992) study documented for the first time the J-shaped pattern a while ago. The tapering pattern is detected for NASDAQ stocks by Chan, Christie and Schultz (1995) who suggest that the non-J-shaped pattern is due to the different trading venue.

Suggested Citation

  • Stoyu Ivanov, 2017. "Comparative Analysis of ETF and Common Stock Intraday Bid-Ask Spread Behavior," Economics Bulletin, AccessEcon, vol. 37(2), pages 723-732.
    • Handle: RePEc:ebl:ecbull:eb-17-00221
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    File URL: http://www.accessecon.com/Pubs/EB/2017/Volume37/EB-17-V37-I2-P66.pdf
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    References listed on IDEAS

    as
    1. Benston, George J. & Hagerman, Robert L., 1974. "Determinants of bid-asked spreads in the over-the-counter market," Journal of Financial Economics, Elsevier, vol. 1(4), pages 353-364, December.
    2. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    3. Chelley-Steeley, Patricia & Park, Keebong, 2011. "Intraday patterns in London listed Exchange Traded Funds," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 244-251.
    4. Stoll, Hans R, 1978. "The Pricing of Security Dealer Services: An Empirical Study of NASDAQ Stocks," Journal of Finance, American Finance Association, vol. 33(4), pages 1153-1172, September.
    5. Chan, Kalok & Chung, Y. Peter & Johnson, Herb, 1995. "The Intraday Behavior of Bid-Ask Spreads for NYSE Stocks and CBOE Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(3), pages 329-346, September.
    6. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, vol. 8(1), pages 31-53, March.
    7. McInish, Thomas H & Wood, Robert A, 1992. "An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks," Journal of Finance, American Finance Association, vol. 47(2), pages 753-764, June.
    8. Chan, K C & Christie, William G & Schultz, Paul H, 1995. "Market Structure and the Intraday Pattern of Bid-Ask Spreads for NASDAQ Securities," The Journal of Business, University of Chicago Press, vol. 68(1), pages 35-60, January.
    9. Hasbrouck, Joel, 1988. "Trades, quotes, inventories, and information," Journal of Financial Economics, Elsevier, vol. 22(2), pages 229-252, December.
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    More about this item

    Keywords

    Exchange Traded Funds; ETF; Common Stock; Bid-Ask Spread;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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