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An Extended Model of Serial Covariance Bid-Ask Spreads

Author

Listed:
  • Dar-Hsin Chen

    (Deparement of Banking and Finance, Tamkang University, Taiwan)

  • Lloyd P. Blenman

    (Department of Finance and Business Law, University of North Carolina-Charlotte,U.S.A.)

Abstract

This 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.

Suggested Citation

  • Dar-Hsin Chen & Lloyd P. Blenman, 2003. "An Extended Model of Serial Covariance Bid-Ask Spreads," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 2(1), pages 75-83, April.
    • Handle: RePEc:ijb:journl:v:2:y:2003:i:1:p:75-83
    as

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    References listed on IDEAS

    as
    1. Raymond Brooks & Jean Masson, 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 459-476, December.
    2. 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 459-476, Winter.
    3. 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(2), pages 219-230, June.
    4. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    5. repec:bla:jfinan:v:44:y:1989:i:1:p:115-34 is not listed on IDEAS
    6. Roll, Richard, 1984. "A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-1139, September.
    7. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    bid-ask spread; implicit spread; tick test;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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