The Dynamics of Discrete Bid and Ask Quotes

37 Pages Posted: 21 Jan 1997

See all articles by Joel Hasbrouck

Joel Hasbrouck

New York University (NYU) - Department of Finance

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Date Written: December 2, 1996

Abstract

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.

JEL Classification: C35

Suggested Citation

Hasbrouck, Joel, The Dynamics of Discrete Bid and Ask Quotes (December 2, 1996). Available at SSRN: https://ssrn.com/abstract=1042 or http://dx.doi.org/10.2139/ssrn.1042

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