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Activity Number: 451
Type: Contributed
Date/Time: Wednesday, August 6, 2008 : 2:00 PM to 3:50 PM
Sponsor: Business and Economics Statistics Section
Abstract - #301360
Title: The Information Content of Trades: A Class of Market Microstructure Models
Author(s): Anna Valeva*+
Companies: Western Illinois University
Address: Information Systems and Decision Sciences, Macomb, IL, 61455,
Keywords: market microstructure ; asymmetric information ; bid-ask spread ; hidden Markov model ; volume of trade
Abstract:

We focus on a class of models in which the market specialist exploits the information content of trades to set the bid-ask spread for a given asset in an asymmetric information environment. While the idea for such type of models dates back to the mid nineteen eighties, we adopt an infinite horizon and introduce a dynamic way of quantifying the private information through privileged knowledge about the dividend process associated with the asset. Thus, we have a 'perpetual' model for the dynamics of the bid-ask spread, in which the market specialist updates her/his beliefs about the unobservable components of the model and tries to infer the privileged information from the volume of trade.

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