Adverse Selection and Re-Trade

25 Pages Posted: 4 Mar 2002

See all articles by Nicolae Garleanu

Nicolae Garleanu

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 29, 2002

Abstract

Many securities are traded repeatedly by asymmetrically informed investors. We study how current and future adverse selection affect the required return. We find that the bid-ask spread generated by adverse selection is not a cost, on average, for agents who trade, and hence the bid-ask spread does not directly influence the required return. Adverse selection leads to trading-decision distortions, however, implying allocation costs, which affect the required return. We derive explicitly the effect on required returns, and show that our result differs from models that consider the bid-ask spread to be an exogenous cost.

Suggested Citation

Garleanu, Nicolae Bogdan and Pedersen, Lasse Heje, Adverse Selection and Re-Trade (January 29, 2002). Available at SSRN: https://ssrn.com/abstract=302025 or http://dx.doi.org/10.2139/ssrn.302025

Nicolae Bogdan Garleanu

University of California, Berkeley - Haas School of Business ( email )

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HOME PAGE: http://faculty.haas.berkeley.edu/garleanu

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Lasse Heje Pedersen (Contact Author)

AQR Capital Management, LLC ( email )

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United States

Copenhagen Business School - Department of Finance ( email )

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Denmark

New York University (NYU) ( email )

Stern School of Business
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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom