medium · Market Microstructure
A stock has a daily standard deviation of 2%. A dealer's average inventory is 5,000 shares of the 100stock, and they are quite risk-averse.
If volatility suddenly doubles to 4% per day, how should the inventory component of the spread change according to the Stoll (1978) model?
- It should double
- It should remain the same
- It should increase by √(2)
- It should quadruple
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