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Title: 

The Dynamics of Discrete Bid and Ask Quotes

Authors: Hasbrouck, Joel
Issue Date: 16-Feb-1996
Series/Report no.: FIN-95-023
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.
URI: http://hdl.handle.net/2451/27130
Appears in Collections:Finance Working Papers

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