Relation between Bid-Ask Spread, Impact and Volatility in Double Auction Markets
| dc.creator | Wyart, Matthieu | |
| dc.creator | Bouchaud, Jean-Philippe | |
| dc.creator | Kockelkoren, Julien | |
| dc.creator | Potters, Marc | |
| dc.creator | Vettorazzo, Michele | |
| dc.date | 2006-03-10 | |
| dc.date | 2007-03-12 | |
| dc.date.accessioned | 2026-07-07T12:07:43Z | |
| dc.date.available | 2026-07-07T12:07:43Z | |
| dc.description | 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 R^2s exceeding 0.9. This correlation suggests both that the main determinant of the bid-ask spread is adverse selection, and that most of the volatilitycomes 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. | |
| dc.description | 35 pages, 12 figures, still improved version | |
| dc.identifier | https://arxiv.org/abs/physics/0603084 | |
| dc.identifier | http://arxiv.org/abs/physics/0603084 | |
| dc.identifier.uri | http://salesiana.dossiersoluciones.com/handle/123456789/209070 | |
| dc.subject | Data Analysis, Statistics and Probability | |
| dc.subject | Other Condensed Matter | |
| dc.subject | Physics and Society | |
| dc.subject | Trading and Market Microstructure | |
| dc.title | Relation between Bid-Ask Spread, Impact and Volatility in Double Auction Markets | |
| dc.type | text |