26. Liquidity on the Capital Market with Asymmetric Information

The effectiveness of the investment is strongly dependent on the liquidity of the shares and the degree of asymmetry of information between the market participants. There is a strong evidence in the literature that stock illiquidity should increase with information asymmetry. An important question is, if different approximations of information asymmetry are consistent in their indications. This study examines the various adverse selection measures including bid–ask spreads calculated on the basis of real transaction data and measures calculated from daily data. We consider stocks listed constantly from 2006 through 2016 on the Warsaw Stock Exchange and calculate the Pearson and the Spearman rank correlations for daily effective spread proxies across the sample. The capitalization and different periods of time are taken into account. We find that various adverse selection measures are characterized by different informational contents, resulting in relatively low coherence of the proxies used in the study.