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Statistical Properties of the Roll Serial Covariance Bid/Ask Spread Estimator

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  • Harris, Lawrence

Abstract

Exact small sample population moments of the standard serial covariance and variance estimators are derived under the assumptions of the Roll bid/ask spread models. Noise explains why serial covariance estimates are often positive in annual samples of daily and weekly returns. Small sample estimator bias partially explains why weekly estimates are more negative than daily estimates. Noise causes the Roll spread estimator to be severely biased by Jensen's inequality. The French-Roll adjusted variance estimator is unbiased but noisy. Empirical tests confirm the major implications. Copyright 1990 by American Finance Association.

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  • Harris, Lawrence, 1990. "Statistical Properties of the Roll Serial Covariance Bid/Ask Spread Estimator," Journal of Finance, American Finance Association, vol. 45(2), pages 579-590, June.
    • Handle: RePEc:bla:jfinan:v:45:y:1990:i:2:p:579-90
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