Using Intra-Day Data to Analyze Bid-Ask Spread: A Case of Mauritius Stock Exchange

The focus of this study is to assess the determinants of daily bid-ask spread. Following Ng (2007), the study uses an effective spread rather than a quoted one. Ng, argues that an effective spread is based on the deviation between trade price (true price) of the transaction. First, a daily spread of the individual stocks is modeled to see whether it is determined by the same variables and then, the effects of the variables are analyzed using panel data. The study also analyzes the day of the week effect in the daily average spread, to see if the spread is dependent on any day of the week. Similar to Demsetz (1968), the panel data results obtained show that the bid-ask spread is dependent on the closing price of stock, level of market activity, the firm size and the liquidity of the stock. Also, the firm size exhibits an inverse relationship with the daily spread. Contrary to McInish and Wood (1992), this study concludes a positive relationship between the level of market activity and the daily bid-ask spread.