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Semiparametric estimation of the bid–ask spread in extended roll models

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  • Chen, Xiaohong
  • Linton, Oliver
  • Schneeberger, Stefan
  • Yi, Yanping

Abstract

We propose new methods for estimating the bid–ask spread from observed transaction prices alone. Our methods are based on the empirical characteristic function. We compare our methods theoretically and numerically with the Roll (1984) method as well as with its best known competitor, the Hasbrouck (2004) method, and find that our estimators perform much better when this distribution is far from Gaussian. Our methods are applied to the E-mini futures contract on the S&P 500 during the Flash Crash of May 6, 2010. We also establish T consistency and asymptotic normality of the proposed estimators in various extended Roll models.

Suggested Citation

  • Chen, Xiaohong & Linton, Oliver & Schneeberger, Stefan & Yi, Yanping, 2019. "Semiparametric estimation of the bid–ask spread in extended roll models," Journal of Econometrics, Elsevier, vol. 208(1), pages 160-178.
    • Handle: RePEc:eee:econom:v:208:y:2019:i:1:p:160-178
    DOI: 10.1016/j.jeconom.2018.09.010
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    More about this item

    Keywords

    Bid–ask spread; Roll model; Semiparametric estimation; Empirical characteristic function; Latent variables;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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