The focus of this study is to assess the determinants of daily bid-ask spread. Following Ng (2007), the study uses an effective spread rather than a quoted one. Ng, argues that an effective spread is based on the deviation between trade price (true price) of the transaction. First, a daily spread of the individual stocks is modeled to see whether it is determined by the same variables and then, the effects of the variables are analyzed using panel data. The study also analyzes the day of the week effect in the daily average spread, to see if the spread is dependent on any day of the week. Similar to Demsetz (1968), the panel data results obtained show that the bid-ask spread is dependent on the closing price of stock, level of market activity, the firm size and the liquidity of the stock. Also, the firm size exhibits an inverse relationship with the daily spread. Contrary to McInish and Wood (1992), this study concludes a positive relationship between the level of market activity and the daily bid-ask spread.

Like any market, demand and supply forces, through the mechanism of influencing prices, brings about equilibrium in the market. In any financial market, the market has the ability to determine the proper price of the assets traded. The shift from regulating institutions to regulating functions coupled with innovated products in the market has lead to tremendous growth in the financial sector. This change has made the market microstructure an interesting field in the area of finance for academics, market participants, stock exchanges, regulators and policy makers. Most literature, particularly in the short run, deals with the actual behavior of markets in order to explain how prices are determined, how price setting rules evolve in markets and why prices exhibit particular time series properties. These issues have important implications for market regulation and for the design of trading mechanisms. In particular, the short-run behavior of trading prices reflects the process of the instant matching of supply and demand from a relatively small number of investors, who are trading the individual asset at a given point in time. Investors' trading strategies determine the market equilibrium, and such strategies depend on the individual's information, desire for liquidity and perception of the trading environment.

Market microstructure focuses on whether the sources of price variations are trading-related. Specifically a trade might influence the two components of the price by the fact and the time of its occurrence, the price and volume (quantity) and whether it is buyer or seller initiated. Bid-ask spreads are compensations to market makers (dealers) for providing liquidity. O'Hara (1995) defines market microstructure as, "the study of the process and outcomes of exchanging assets under a specific set of rules". To the author, microstructure theory explains the formation process of specific trading mechanisms. To Madhavan (2000), market microstructure is that area of finance which studies the process through which investors demand into price and volumes. To quote Stoll (2002), "market microstructure deals primarily with the market for transaction services and with the price of those services as reflected in the bid-ask spread and commissions".

Intra-Day Data, Bid-Ask Spread, Mauritius Stock Exchange, Market participants, Market capitalization, Policy makers, Stock Exchange of Mauritius, Financial sector, Market microstructure, Market regulation, Financial market, Individual stocks, Market maker.