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Security Bid/Ask Dynamics with Discreteness and Clustering: Simple Strategies for Modeling and Estimation

  • Joel Hasbrouck
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    The short-term movements of a security price reflect the latent efficient price (conditional expectation of terminal value) and also components arising from the trading mechanism itself. Observed bid and ask quotes are but rough signals of these unobserved quantities. The bid and ask quotes in the $/DM market considered here, for example, are discrete, with a tick size that is not trivial relative to the spread. Furthermore, the distribution of these quotes is clustered, with a greater-than-expected incidence of five-tick multiples. This paper suggests a simple framework for handling discrete, clustered quotes. Despite the simplicity of the model, estimation by traditional (likelihood or moment) methods is difficult. As an alternative, the paper implements a Gibbs sampler approach that proves to be quick and effective. This strategy opens the door for the investigation of a broad class of structural microstructure models.

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    File URL: http://www.stern.nyu.edu/fin/workpapers/wpa98042.pdf
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    Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 98-042.

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    Date of creation: 05 Oct 1998
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    Handle: RePEc:fth:nystfi:98-042
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    U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126

    Phone: (212) 998-0100
    Web page: http://w4.stern.nyu.edu/finance/

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