hard · Market Microstructure spread-econ
A buyer executes at 100.04 (M_t = 100.00). The realized spread is -0.04. Interpret the relationship between effective spread and adverse selection.
- There was no adverse selection, since the realized spread came out negative.
- The effective spread is exactly twice the adverse selection component, giving 0.04 here.
- The adverse selection component equals the effective spread, leaving a realized spread of zero.
- The adverse selection component (0.12) is 1.5 times the effective spread (0.08).
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