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| Volume 2, No. 1, April
2003
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| An
Extended Model of Serial Covariance Bid-Ask Spreads |
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| Dar-Hsin Chen |
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Deparement of
Banking and Finance, Tamkang University, Taiwan |
| Lloyd P. Blenman |
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Department of Finance and
Business Law, University of North Carolina-Charlotte,U.S.A. |
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| Abstract |
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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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Key words:
bid-ask spread; implicit spread; tick test |
| JEL
classification:
G10; D80 |
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