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- Title
An Analysis of Estimates of the Inventory Holding Component of the Bid-Ask Spread.
- Authors
Pirim, Birsel T.; Van Ness, Bonnie F.; Van Ness, Robert A.; Kugele, Lynn P.
- Abstract
We examine the performance of three spread decomposition models which provide estimates of the inventory holding component of the bid-ask spread. As benchmarks for the analysis, we use three order imbalance metrics as well as the percentage spread. We compare the inventory holding cost estimates of these models with variables reflecting conditions expected to impact the level of inventory cost. The models studied produce mixed results. Inventory holding costs correlate with various measures of trading frequency, volatility and the availability of traded options. Two of the models report the expected relationships with a significant number of explanatory variables yet their inventory cost estimates vary widely. Additional concerns relate to the possibility that these models are merely weak reflections of the spread itself since the variables found to impact inventory holding cost are also well known to be strong determinants of the overall spread.
- Subjects
SPREAD (Finance); COST estimates; ASKED price; BID price; INVENTORY accounting; ORDER picking systems; MARKET volatility; FINANCIAL markets; NASDAQ Stock Market
- Publication
Banking & Finance Review, 2010, Vol 2, Issue 2, p1
- ISSN
1947-7945
- Publication type
Article