Modeling the bid/ask spread: Measuring the inventory-holding premium (.pdf)
This article models (and tests!) the bid/ask spread of stock trades and models it as a function of “minimum tick size, order-processing costs, inventory holding costs, adverse selection costs, and competition.” VERY cool. And the model even seems to work empirically! [FinanceProfessor.com Annotation]
Content: Article | Authors: Nicholas P.B. Bollen, Robert E. Whaley, Tom Smith | Source: Journal of Financial Economics | Subjects: Finance, Industry Specific | Industry: Investment Banking