An Extended Model of Serial Covariance Bid-Ask Spreads
AbstractThis paper presents a generalized serial covariance spread pricing model that unifies and improves existing spread models. We analyze three cost components of spread: order processing, adverse information, and inventory holding costs. We modify Stoll's (1989) model by incorporating a two-period conditional probability trading model to derive a new spread estimator. We propose a methodology to estimate the input parameters. We then show this extended model potentially avoids some of the limitations associated with earlier models.
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Bibliographic InfoArticle provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.
Volume (Year): 2 (2003)
Issue (Month): 1 (April)
bid-ask spread; implicit spread; tick test;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
- Stoll, Hans R, 1989. " Inferring the Components of the Bid-Ask Spread: Theory and Empirical Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 115-34, March.
- Choi, J. Y. & Salandro, Dan & Shastri, Kuldeep, 1988. "On the Estimation of Bid-Ask Spreads: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(02), pages 219-230, June.
- Brooks, Raymond & Masson, Jean, 1996. "Performance of Stoll's Spread Component Estimator: Evidence from Simulations, Time-Series, and Cross-Sectional Data," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 19(4), pages 459-76, Winter.
- Aitken, Michael & Frino, Alex, 1996. "The accuracy of the tick test: Evidence from the Australian stock exchange," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1715-1729, December.
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