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A new spread estimator

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journal contribution
posted on 07.09.2018, 14:15 by Michael Bleaney, Zhiyong Li
A new estimator of bid-ask spreads is presented. When the trade direction is known, any estimate of the spread is associated with a unique series of conjectural mid-prices derived by adjusting the observed transaction price by half the estimated spread. It is shown that the covariance of successive conjectural mid-price returns is maximised (or least negative) when the estimated spread is equal to the true spread. A search procedure to maximise this covariance may therefore be used to estimate the true spread. The performance of this estimator under various conditions is examined both theoretically and with Monte Carlo simulations. The simulations confirm the theoretical results. The performance of the estimator is good.

History

Citation

Review of Quantitative Finance and Accounting, 2016, 47 (1), pp. 179-211 (33)

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/School of Business

Version

AM (Accepted Manuscript)

Published in

Review of Quantitative Finance and Accounting

Publisher

Springer Verlag (Germany)

issn

0924-865X

eissn

1573-7179

Copyright date

2015

Available date

07/09/2018

Publisher version

https://link.springer.com/article/10.1007/s11156-015-0499-z

Notes

The online version of this article (doi: 10.1007/s11156-015-0499-z) contains supplementary material, which is available to authorized users.

Language

en