Journal article | Zeitschriftenartikel
Relation between Bid-Ask Spread, Impact and Volatility in Order-Driven Markets
We show that the cost of market orders and the profit of infinitesimal market-making or -taking strategies can be expressed in terms of directly observable quantities, namely the spread and the lag-dependent impact function. Imposing that any market taking or liquidity providing strategies is at best marginally profitable, we obtain a linear relation between the bid-ask spread and the instantaneous impact of market orders, in good agreement with our empirical observations on electronic markets. We then use this relation to justify a strong, and hitherto unnoticed, empirical correlation between the spread and the volatility per trade, with R2s exceeding 0.9. This correlation suggests both that the main determinant of the bid-ask spread is adverse selection, and that most of the volatility comes from trade impact. We argue that the role of the time-horizon appearing in the definition of costs is crucial and that long-range correlations in the order flow, overlooked in previous studies, must be carefully factored in. We find that the spread is significantly larger on the NYSE, a liquid market with specialists, where monopoly rents appear to be present.
- Umfang
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Seite(n): 41-57
- Sprache
-
Englisch
- Anmerkungen
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Status: Postprint; begutachtet (peer reviewed)
- Erschienen in
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Quantitative Finance, 8(1)
- Thema
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Wirtschaft
Öffentliche Finanzen und Finanzwissenschaft
- Ereignis
-
Geistige Schöpfung
- (wer)
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Bouchaud, Jean-Philippe
Vettorazzo, Michele
Kockelkoren, Julien
Wyart, Matthieu
Potters, M
- Ereignis
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Veröffentlichung
- (wo)
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Vereinigtes Königreich
- (wann)
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2007
- DOI
- URN
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urn:nbn:de:0168-ssoar-221056
- Rechteinformation
-
GESIS - Leibniz-Institut für Sozialwissenschaften. Bibliothek Köln
- Letzte Aktualisierung
-
21.06.2024, 16:27 MESZ
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Objekttyp
- Zeitschriftenartikel
Beteiligte
- Bouchaud, Jean-Philippe
- Vettorazzo, Michele
- Kockelkoren, Julien
- Wyart, Matthieu
- Potters, M
Entstanden
- 2007
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