An extended model of serial covariance bid-ask spreads

Abstract

This paper presents a generalized serial covariance spread pricing model in which the existing spread models are unified and the three cost components of spread - order processing, adverse information, and inventory holding costs - are considered The basic idea is to modify Stall's (1989) model by incorporating a two-period conditional probability. This paper also proposes a methodology to estimate the input parameters It shows that this extended model is a generalization of the models developed by Roll ( 1984), Choi, Slandro, and Shastri (1988), Stoll ( 1989), and Chu, Ding, and Pyun ( 1996)