A new spread estimator

Bleaney, Michael; Li, Zhiyong

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), https://doi.org/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: Springer Verlag
• 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: https://nottingham-repository.worktribe.com/output/748043
• Publisher URL: https://link.springer.com/article/10.1007%2Fs11156-015-0499-z