Security Bid/Ask Dynamics with Discreteness and Clustering: Simple Strategies for Modeling and Estimation

Joel Hasbrouck
1998 Social Science Research Network  
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.
doi:10.2139/ssrn.59768 fatcat:aqtzputfdrejjlnjyjvjhlef2a