Security bid/ask dynamics with discreteness and clustering: Simple strategies for modeling and estimation |
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Institution: | Stern School of Business, New York University, Suite 9-190 Mail Code 0268, 44 West Fourth St., New York, NY 10012-1126, USA |
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Abstract: | This paper proposes a dynamic model of bid and ask quotes that incorporates a stochastic cost of market-making, discreteness (restriction of quotes to a fixed grid) and clustering (the tendency of quotes to lie on `natural' multiples of the tick size). The Gibbs sampler provides a convenient vehicle for estimation. The model is estimated for daily and intradaily US Dollar/Deutschemark Reuters quotes. |
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