Security Bid/Ask Dynamics with Discreteness and Clustering: Simple Strategies for Modeling and Estimation

43 Pages Posted: 7 Nov 2008

See all articles by Joel Hasbrouck

Joel Hasbrouck

New York University (NYU) - Department of Finance

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Date Written: October 1998

Abstract

This paper proposes a dynamic model of bid and ask quotes that incorporates a stochastic cost of market-making, discreteness (restriction of quotes to a fixed grid) and clustering (the tendency ofquotes to lie on â¬Snaturalâ¬? multiples of the tick size). The Gibbs sampler provides a convenient vehicle for estimation. The model is estimated for daily and intradaily US Dollar/Deutschemark Reuters quotes.

Keywords: Quotes, foreign exchange, Gibbs sampler, Markov chain Monte Carlo, discreteness, clustering, security prices

Suggested Citation

Hasbrouck, Joel, Security Bid/Ask Dynamics with Discreteness and Clustering: Simple Strategies for Modeling and Estimation (October 1998). NYU Working Paper No. FIN-98-042, Available at SSRN: https://ssrn.com/abstract=1297114

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