Graduation Year

Fall 2011

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Eric Hughson

Reader 2

Gregory Hess

Rights Information

© 2011 Kevin Potterton

Abstract

This paper provides a numerical method for demonstrating that bid-ask spreads increase with information asymmetry or the probability of insider trading. These spreads also decrease throughout the trading day. Average daily spreads are a non-monotone function of information asymmetry. This result brings into question empirical results showing that higher levels of inside information lead to higher expected returns.

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