Some analytical results for models of the bid-ask spread
Document Type
Article
Publication Title
Business and Management Research
Abstract
The focus of this paper is on order processing models of the bid-ask spread, also termed as fixed-cost models. While other theories have been advanced to explain spreads, such as inventory holding costs and adverse selection, research indicates that the fixed cost component constitutes the bulk of the observed spread. This paper starts with the Roll model and the subsequent extension of Choi, Salandro and Shastri. It takes cognizance of the implications of such models for the observed stock prices and the mid-points of bid-ask quotes, to set up tests using the Generalized Method of Moments (GMM) technique. The paper develops an analytical variance-covariance matrix for the fixed cost model with instantaneous adjustment of prices to new information.
DOI Link
Publication Date
30-9-2020
Publisher
Sciedu Press
Volume
Vol.9
Issue
Iss.3
Recommended Citation
Parameswaran, Sunil K and Basu, Sankarshan, "Some analytical results for models of the bid-ask spread" (2020). Faculty Publications. 329.
https://research.iimb.ac.in/fac_pubs/329
