Measuring the Bid-Ask Spread: A Note on the Potential Downward Bias of the Thompson-Waller Estimator

15 Pages Posted: 20 Feb 2013

See all articles by Yoichi Otsubo

Yoichi Otsubo

University of Manchester - Alliance Manchester Business School

Date Written: February 19, 2013

Abstract

The upward bias of the widely used Thompson-Waller estimator has been pointed out in the literature. In contrast the current paper provides a case the estimator would have downward bias. Such case satisfies the two conditions: (i) the buy (sell) order tends to follow buy (sell) order and (ii) the price change associated to such orders are small. The upward bias might be cancelled out by downward bias, and the estimator might perform better than the other methods such as Wang-Yau-Baptiste used by the CFTC. The high-frequency data of the emissions market allows us to provide an empirical evidence.

Keywords: Bid-ask spread, futures market, market microstructure, Thompson-Waller estimator

JEL Classification: C18, G12, G19

Suggested Citation

Otsubo, Yoichi, Measuring the Bid-Ask Spread: A Note on the Potential Downward Bias of the Thompson-Waller Estimator (February 19, 2013). Available at SSRN: https://ssrn.com/abstract=2220834 or http://dx.doi.org/10.2139/ssrn.2220834

Yoichi Otsubo (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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