International Journal of Business and Economics Volume 2, No. 1 April​, 2003

An Extended Model of Serial Covariance Bid-Ask Spreads

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.

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.

JEL Classifications：G10, D80.

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