A Model of True Spreads on Limit Order Markets

28 Pages Posted: 21 Apr 2011

See all articles by James McCulloch

James McCulloch

University of Technology, Sydney; Macquarie University

Date Written: April 19, 2011

Abstract

True spreads are not directly observable and represent the continuous demand and supply schedule for stock liquidity by heterogeneously informed market participants on limit order markets. Observed spreads are true spreads quantized by minimum market tick size. A maximum likelihood regression model of true spreads is developed. True spreads are modelled as a continuous positive distribution parameterized by stock turnover and volatility. Nominal stock price is not a significant explanatory variable in modelling true spreads. Nominal stock price is shown to be a significant explanatory variable of observed spreads only as an artifact of minimum tick size.

Keywords: True Spread, Censored Spread, Observed Spread, Tick Size, Exchange Policy

JEL Classification: G14, C52

Suggested Citation

McCulloch, James, A Model of True Spreads on Limit Order Markets (April 19, 2011). Available at SSRN: https://ssrn.com/abstract=1815782 or http://dx.doi.org/10.2139/ssrn.1815782

James McCulloch (Contact Author)

University of Technology, Sydney ( email )

15 Broadway, Ultimo
Sydney 2007, New South Wales
Australia

Macquarie University

North Ryde
Sydney, New South Wales 2109
Australia

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
114
Abstract Views
959
Rank
435,891
PlumX Metrics