An Analysis of the Inventory Holding Components of the Bid-Ask Spread

34 Pages Posted: 14 May 2009

See all articles by Birsel T. Pirim

Birsel T. Pirim

affiliation not provided to SSRN

Bonnie F. Van Ness

University of Mississippi - Department of Finance

Robert A. Van Ness

University of Mississippi - Department of Finance

Date Written: May 14, 2009

Abstract

We examine the performance of three spread decomposition models which provide estimates of the inventory holding component of the bid-ask spread: the Stoll (1989), Huang and Stoll (1997), and Bollen, Smith, and Whaley (2004) models. As a benchmark for the analysis, we use the order imbalance metrics of Bessembinder’s (2002) and Chordia and Subrahmanyam’s (2002) as well as the percentage spread. We find that the Bollen, Smith, and Whaley (2004) model has the largest number of predicted relations (although the Stoll, 1989 model also performs well) with proxies for inventory holding costs. We recommend that researchers needing to use the inventory holding component of the spread use either the Bollen, Smith, and Whaley (2004) or Stoll (1989) model.

Keywords: Inventory Holding, spread components

JEL Classification: G19

Suggested Citation

Pirim, Birsel T. and Van Ness, Bonnie F. and Van Ness, Robert A., An Analysis of the Inventory Holding Components of the Bid-Ask Spread (May 14, 2009). Available at SSRN: https://ssrn.com/abstract=1404804 or http://dx.doi.org/10.2139/ssrn.1404804

Birsel T. Pirim

affiliation not provided to SSRN

Bonnie F. Van Ness

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States
662-915-6749 (Phone)
662-915-7968 (Fax)

Robert A. Van Ness (Contact Author)

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States