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Asset pricing and the bid-ask spread

Yakov Amihud, Haim Mendelson

Journal of Financial Economics · 1986 · 5,349 citationsOpen access

doi.org/10.1016/0304-405x(86)90065-6Free full text

Abstract

This paper studies the effect of the bid-ask spread on asset pricing. We analyze a model in which investors with different expected holding periods trade assets with different relative spreads. The resulting testable hypothesis is that market-observed expexted return is an increasing and concave function of the spread. We test this hypothesis, and the empirical results are consistent with the predictions of the model.

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Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of Financial Economics, 17(2), 223–249. https://doi.org/10.1016/0304-405x(86)90065-6

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