The Dynamics of Discrete Bid and Ask Quotes
New York University (NYU) - Department of Finance
NYU Working Paper No. FIN-95-023
This analysis models discrete quotes as arising from two continuous random variables, the efficient price and a cost of quote exposure (information and processing costs). The former less the latter rounded down to the next tick yields the bid; the former plus the latter rounded up yields the ask. To deal with situations in which the cost of quote exposure possesses both stochastic and deterministic components, the paper proposes a nonlinear state-space estimation method. The method is applied to intraday quotes at fifteen-minute intervals for Alcoa (a randomly chosen Dow stock). The results confirm the existence of deterministic and stochastic components of the cost that are of roughly comparable magnitudes.
Number of Pages in PDF File: 36working papers series
Date posted: November 11, 2008
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