A new spread estimator

Bleaney, Michael and Li, Zhiyong (2015) A new spread estimator. Review of Quantitative Finance and Accounting, 47 (1). pp. 179-211. ISSN 1573-7179

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Abstract

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.

Item Type: Article
Keywords: Bid-ask spread; Feedback trading; Estimation
Schools/Departments: University of Nottingham Ningbo China > Faculty of Business > Nottingham University Business School China
University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Identification Number: 10.1007/s11156-015-0499-z
Depositing User: LIN, Zhiren
Date Deposited: 25 Oct 2017 10:48
Last Modified: 25 Oct 2017 10:57
URI: http://eprints.nottingham.ac.uk/id/eprint/47520

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