Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread
Bibliographic Data
| ID | 10177009 |
|---|---|
| Authors | Kalman J Cohen, Steven F Maier (0000-0002-3370-6160), Robert A Schwartz (0000-0003-3036-3825), David K Whitcomb |
| Year | 1981 |
| Volume | 89 |
| Issue | 2 |
| Pages | 287-305 |
| Publication date | 1981-04-01 |
| Peer Reviewed | Yes |
| Open Access | No |
| Type | ARTICLE |
| Venue | Journal of Political Economy (JOURNAL) |
| Journal identifiers | ISSN: 0022-3808 • E-ISSN: 1537-534X |
| Publisher | University of Chicago Press (PUBLISHER • US) |
| DOI | 10.1086/260966 |
| OpenAlex | W1995203962 |
| Language | EN |
| Citations received | 3 |
| References cited | 8 |
By considering investor order placement strategy, this paper demonstrates that transaction costs cause bid-ask spreads to be an equilibrium property of asset markets. With transaction costs, the probability of a limit order executing does not go to unity as the order is placed infinitesimally close to a counterpart market quote; thus, with certainty of execution at the counterpart market quote, a "gravitational pull" is generated that keeps counterpart quotes from being placed infinitesimally close to each other. An equilibrium spread is defined and its size linked to market thinness; implications are noted for the design of a trading system
Ask price · Asset (computer security · Bid price · Bid–ask spread · Business · Certainty · Computer security · Database transaction · Economics · Infinitesimal · Limit (mathematics · Market liquidity · Market maker · Market microstructure · Mathematical economics · Microeconomics · Monetary economics · Order (exchange · Property (philosophy · Transaction cost · Complex Systems and Time Series Analysis · Computer Science · Economic theories and models · Finance · Financial Markets and Investment Strategies · Mathematics
| Unique citing works | 3 |
|---|---|
| Citations per year | 0,1 |
| Citation span | 1996 - 2016 (21) |
| Citation velocity | historical |
| Highly cited | No |
| Citation types | Neutral: 3 |