An analysis of the bid-ask spread for risk-averse traders in a limit-order market

概要

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In this paper, I analyze the relationship between the equilibriunm spread and the trader's risk aversion coefficient, with represents the degree of risk aversion in a limit-order market. I extend Handa et al.(2003) to examine the effect of risk aversion on the equilibrium spread in the market. I show that an increase in risk aversion widens the spread. Handa et al. (2003) show empirically that the spread depends on the proportion of buyers in the market. This empirical result is consistent with the theoretical result derived in this paper.