Date of Award


Document Type


Degree Name

Doctor of Philosophy (PhD)


Finance (Business Administration)

First Advisor

Ji-Chai Lin


The purpose of this dissertation is to examine the strategic behavior of the specialist proposed by Glosten (1989) and its implications for price volatility and market liquidity. The extant literature suggests that the bid-ask spread is responsible, at least in part, for the greater volatility and more negative autocorrelation at the open than at the close. We find that these phenomena are not related to the bid-ask spread, but related to pricing errors quoted by the specialist or by limit order traders around the open. We use George, Kaul, and Nimalendran's (1991) model, which is less biased than Roll's (1984) model, to estimate the implied spread. The results show that, on average, the implied spread earned by liquidity suppliers is less at the open than at the close. These results refute Stoll and Whaley's (1990) contention that the specialist exploits his monopoly position and earns a higher profit at the opening call. Glosten (1989) posits that when information asymmetry is high, the specialist may reduce profits or even realize losses to induce informed traders to trade and to release their information. This reduces the adverse selection problem and makes subsequent trades more profitable. This hypothesis of averaging profits through time implies that the pattern in the specialist's gross profits is inversely related to the pattern in information asymmetry. Since information asymmetry has been found to be higher at the beginning of the trading day, we predict that gross profits earned by the specialist will be lower at the beginning than during the rest of the trading day. Empirical results are consistent with this hypothesis.