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  • 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. (xsd:string)
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  • 2007 (xsd:gyear)
?:datePublished
  • 2007 (xsd:gyear)
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  • 10.1080/14697680701344515 ()
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  • en (xsd:string)
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  • 1 (xsd:string)
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  • Relation between Bid-Ask Spread, Impact and Volatility in Order-Driven Markets (xsd:string)
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  • Zeitschriftenartikel (xsd:string)
  • journal_article (en)
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  • GESIS-SSOAR (xsd:string)
  • In: Quantitative Finance, 8, 2007, 1, 41-57 (xsd:string)
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?:urn
  • urn:nbn:de:0168-ssoar-221056 ()
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  • 8 (xsd:string)