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 |
Files in This Item:
File | Description | Size | Format | |
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wpa03045.pdf | 254.47 kB | Adobe PDF | View/Open |
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