Bridge over ocean
1 September 2000 Financial Analysts Journal Volume 56, Issue 5

Co-Movements in Bid-Ask Spreads and Market Depth

  1. Tarun Chordia
  2. Richard Roll
  3. Avanidhar Subrahmanyam

Quoted spreads, quoted depth, and effective spreads move together with market- and industrywide liquidity. After controlling for well-known individual liquidity determinants, such as volatility, volume, and price, we found that common influences remain significant and material. For well-diversified size-based portfolios, more than half the variation in quoted spreads is explained by variations in market average trading costs. Daily movements in the average depth of the market explain more than 80 percent of depth variations in size-based portfolios.

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