Journal of Finance Vol. 44 No. 1 1989
Inferring the Components of the Bid-Ask Spread: Theory and Empirical Tests
Abstract
The relation between the square of the quoted bid-ask spread and two serial covariances—the serial covariance of transaction returns and the serial covariance of quoted returns—is modeled as a function of the probability of a price reversal, π, and the magnitude of a price change, ∂, where ∂ is stated as a fraction of the quoted spread. Different models of the spread are contrasted in terms of the parameters, π and ∂. Using data on the transaction prices and price quotations for NASDAQ/NMS stocks, π and ∂ are estimated and the relative importance of the components of the quoted spread—adverse information costs, order processing costs, and inventory holding costs—is determined.
- DOI
- 10.2307/2328278
- Volume
- 44
- Issue
- 1
- Pages
- 115
- Sources
- openalex crossref