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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/27290
Title: Adverse Selection and Re-Trade
Authors: Garleanu, Nicolae
Pedersen, Lasse Heje
Issue Date: Sep-2003
Series/Report no.: FIN-03-045
Abstract: An important feature of financial markets is that securities are traded repeatedly by asymmetrically informed investors. We study how current and future adverse selection affect the required return. We find that the bid-ask spread generated by adverse selection is not a cost, on average, for agents who trade, and hence the bid-ask spread does not directly in uence the required return. Adverse selection contributes to trading-decision distortions, however, implying allocation costs, which affect the required return. We explicitly derive the effect of adverse selection on required returns, and show how our result differs from models that consider the bid-ask spread to be an exogenous cost.
URI: http://hdl.handle.net/2451/27290
Appears in Collections:Finance Working Papers

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