A Regression Model of True Spreads in Limit Order Markets
نویسندگان
چکیده
True spreads are not directly observable and represent the continuous demand and supply schedule for stock liquidity by heterogeneously informed market participants. Observed spreads are true spreads quantized by minimum market tick size. A regression model of true spreads is developed using spread data from a pure limit order electronic exchange. 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.
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