Joel Hasbrouck
ABSTRACT
The short-term movements of a security price reflect the latent efficient
price (conditional expectation of terminal value) and also components arising
from the trading mechanism itself. Observed bid and ask quotes are but
rough signals of these unobserved quantities. The bid and ask quotes in
the $/DM market considered here, for example, are discrete, with a tick
size that is not trivial relative to the spread. Furthermore, the distribution
of these quotes is clustered, with a greater-than-expected incidence of
five-tick multiples. This paper suggests a simple framework for handling
discrete, clustered quotes. Despite the simplicity of the model, estimation
by traditional (likelihood or moment) methods is difficult. As an alternative,
the paper implements a Gibbs sampler approach that proves to be quick and
effective. This strategy opens the door for the investigation of a broad
class of structural microstructure models.
Subject: Market Microstructure (Empirical)
Hasbrouck: (212) 998-0310 jhasbrou@stern.nyu.edu
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