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A new spread estimator

Bleaney, Michael; Li, Zhiyong

Authors

Michael Bleaney

Zhiyong Li



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.

Citation

Bleaney, M., & Li, Z. (in press). A new spread estimator. Review of Quantitative Finance and Accounting, 47(1), doi:10.1007/s11156-015-0499-z

Journal Article Type Article
Acceptance Date Jan 1, 2015
Online Publication Date Mar 5, 2015
Deposit Date Oct 25, 2017
Journal Review of Quantitative Finance and Accounting
Print ISSN 0924-865X
Electronic ISSN 1573-7179
Publisher Humana Press
Peer Reviewed Peer Reviewed
Volume 47
Issue 1
DOI https://doi.org/10.1007/s11156-015-0499-z
Keywords Bid-ask spread; Feedback trading; Estimation
Public URL http://eprints.nottingham.ac.uk/id/eprint/47520
Publisher URL https://link.springer.com/article/10.1007%2Fs11156-015-0499-z

This file is under embargo due to copyright reasons.




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