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A Suggested Model for the Determinants of Bid-Ask Spread: Evidence from
Amman Stock Exchange (ASE).
Abstract
This study aimed at suggesting a model for the main determinants of the bid-ask
spread in the Amman Stock Exchange. Daily trading data for 50 selected companies,
during a 6 years’ time period from 2001 to 2006, was collected from ASE
publications. The suggested explanatory variables (security's specific factors: stock
price, price volatility, trading volume, number of trades), company’s specific factors:
firm size, industry affiliation, ownership concentration, ownership type, and financial
performance), and stock market’s specific factors (tick size)), were significantly
affected the relative bid-ask spread in ASE except the industry affiliation variable.
Also, the cross-sectional variation in spreads in ASE is due primarily to differences in
information asymmetries and differences in order processing cost. The study suggests
that ASE should implement a multiple tick sizes, by defining small number of price
ranges with different (low) tick sizes. The study emphasizes the need for stock
ranking system to use it as a proxy for the security risk, since the bid-ask spread is a
positive function of security risk.
KEYWORDS: Financial Markets, Market Microstructure, Order Driven Market, Transaction Cost,
Bid-Ask Spread, Amman Stock Exchange.