Codes for estimating the adverse selection component of the bid-ask spread (Huang and Stoll, 1997)

[PhuongNguyen]

Hi there,

I am stuck at producing the codes for estimating the adverse selection component of the bid-ask spread following Huang and Stoll (1997) model. The estimation is for my researching thesis. Could you please advise me the codes? I appreciate your help. Thank you very much. Best. Phuong Nguyen

[mkeintz]

What is the formula (or more likely what is the mathematical procedure) for the adverse selection component.  I.e. starting with a series of bid-ask spreads, how would you calculate the component?

[PhuongNguyen]

Hi   @mkeintz,

Thank you for your asking. I do not know another best way to explain the model except uploading here the original model from Huang and Stoll (1997). Please have a read and help. Thank you.

[PhuongNguyen]

I guess we have ask quote, bid quote, and trading prices as the input.