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.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
