Modeling the Bid-Ask Spread by Option Hedging

• Main Authors: Chi-hsien Lin, 林佳賢
• Other Authors: Mei-Hui Guo
• Format: Others
• Language: zh-TW
• Published: 2005
• Online Access: http://ndltd.ncl.edu.tw/handle/17596251658503510346

碩士 === 國立中山大學 === 應用數學系研究所 === 93 === The bid-ask spread costs consist of three components, which include order processing costs, inventory-holding costs, and adverse selection costs. In this paper, we model the inventory-holding costs of the bid-ask spread by option hedging. Theinventory-holding costs are hedged by call or put option positions. Since trades deal with the adverse selection traders are unobservable. We treat it as a latent variable, and Expected-Maximization (EM) algorithm are applied to estimate the related parameters of the model. Simulation studies are performed for several different models. Empirical results of NYSE high frequency data show that the proposed model are obtain appropriate parameter estimation when the returns satisfied normality assumption.