Pricing liquidity
Subtitle: the quantity structure of immediacy prices
By: George C. Chacko, Jakub W. Jurek, Erik Stafford
Contributors: Jurek, Jakub W.; Stafford, Erik; Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 07-017; Working paper (Harvard Business School. Division of Research) -- 07-017
Publisher: Division of Research, Harvard Business School
Published: 2006
Place of publication: Boston]
Language: eng
Number of pages: 40
Description: This paper develops a model for understanding liquidity via the pricing of limit orders. Limit orders can be well defined and priced with the tools of option pricing, allowing the complex tradeoff between transaction size and speed to be reduced to a single price. The option-based framework allows the properties of liquidity to be characterized as functions of the fundamental value and the order flow processes. In the special case when immediate execution is desired, the option strike price at which immediate exercise is optimal determines the effective bid/ask price. A model with full-information, but imperfect market making, is able to describe many of the known properties of transaction costs.
Notes: "First draft: May 2005. This draft: August 2006"--Added t.p.

Includes bibliographical references.