Title

Relative Performance Of Bid-Ask Spread Estimators: Futures Market Evidence

Keywords

Bid-ask spreads; Futures markets; Spread estimators; Transaction costs

Abstract

The issue of transaction costs is the mainstay of the equity market microstructure. Research in the microstructure of futures markets has lagged behind. A primary reason is that futures exchanges in the U.S. do not record bid-ask quotes, requiring these costs to be imputed from transaction price data. A reliable estimator of bid-ask spreads would significantly enhance microstructure research in futures markets. Unique intraday data from the Sydney Futures Exchange (SFE) that include both transaction prices and bid-ask spreads allow us to compare bid-ask spread estimation techniques proposed in the literature against the benchmark of actual spreads in a futures market, and thus identify the best-performing estimator. To maximize relevance, we impose all the constraints that apply in U.S. futures data to perform our estimations. We find that the four bid-ask spread estimators considered significantly underestimate the actual spreads. However, simple moments-based estimators perform better in predicting spreads. © 2005 Elsevier B.V. All rights reserved.

Publication Date

7-1-2006

Publication Title

Journal of International Financial Markets, Institutions and Money

Volume

16

Issue

3

Number of Pages

231-245

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.intfin.2005.02.004

Socpus ID

33646416214 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/33646416214

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