True Spreads and Equilibrium Prices

Tarun Chordia, Clifford A. Ball
1999 Social Science Research Network  
Stocks and other financial assets are traded at prices that lie on a fixed grid determined by the minimum tick size. Observed prices and quoted spreads do not correspond to the equilibrium prices and true spreads that would exist in a market with no minimum tick size. Using Monte Carlo Markov Chain methods, this paper estimates the equilibrium prices and true spreads. For large stocks, most of the quoted spread is attributable to the rounding of prices and the adverse selection component is
more » ... on component is small. The true spread and the adverse selection component are greater for mid-sized stocks.
doi:10.2139/ssrn.168428 fatcat:6qdsajtu4rdopopijs5gat3o6u