An Analysis of the Inventory Holding Components of the Bid-Ask Spread
34 Pages Posted: 14 May 2009
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: Suggested Citation
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