The Logarithmic Acd Model : an Application

This paper introduces the logarithmic autoregressive conditional duration model (Log-ACD model). The logarithmic version allows for more exibility than the ACD model of Engle and Russel (1995), when additional variables are included in the model. We apply the Log-ACD model to bid/ask prices relative to securities listed on the NASDAQ and investigate the way market makers revise their beliefs on these bid and ask prices. The updating behavior of the market makers is closely linked to the evolution of the liquidity of the market over the trading day. for useful remarks and suggestions, and Mr A. Ruttiens from CERA Investment Bank for valuable discussions. Support of the European Commission Human Capital and Mobility Program through the network \Econometric inference using simulation methods" is gratefully acknowledged.