An Extended Model of Serial Covariance Bid-Ask Spreads

Dar-Hsin Chen and Lloyd P. Blenman
Additional contact information
Dar-Hsin Chen: Deparement of Banking and Finance, Tamkang University, Taiwan
Lloyd P. Blenman: Department of Finance and Business Law, University of North Carolina-Charlotte,U.S.A.

International Journal of Business and Economics, 2003, vol. 2, issue 1, 75-83

Abstract: This paper presents a generalized serial covariance spread pricing model that unifies and improves existing spread models. We analyze three cost components of spread: order processing, adverse information, and inventory holding costs. We modify Stoll's (1989) model by incorporating a two-period conditional probability trading model to derive a new spread estimator. We propose a methodology to estimate the input parameters. We then show this extended model potentially avoids some of the limitations associated with earlier models.

Keywords: bid-ask spread; implicit spread; tick test (search for similar items in EconPapers)
JEL-codes: D80 G10 (search for similar items in EconPapers)
Date: 2003
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