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A new spread estimator

Bleaney, Michael; Li, Zhiyong

Authors

Michael Bleaney michael.bleaney@nottingham.ac.uk

Zhiyong Li zhiyong.li@nottingham.edu.cn



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.

Journal Article Type Article
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
APA6 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
DOI https://doi.org/10.1007/s11156-015-0499-z
Keywords Bid-ask spread; Feedback trading; Estimation
Publisher URL https://link.springer.com/article/10.1007%2Fs11156-015-0499-z


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