Relative Performance of Bid-Ask Spread Estimators: Futures Markets Evidence

Posted: 10 Jul 2020

See all articles by Amber Anand

Amber Anand

Syracuse University - Whitman School of Management

Ahmet K Karagozoglu

Hofstra University, Zarb School of Business; New York University (NYU) - Volatility and Risk Institute

Date Written: 2006

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.

Keywords: transaction costs, bid–ask spreads, spread estimators, futures markets

JEL Classification: G10

Suggested Citation

Anand, Amber and Karagozoglu, Ahmet K, Relative Performance of Bid-Ask Spread Estimators: Futures Markets Evidence (2006). The Journal of International Financial Markets, Institutions & Money, July 2006, v.16, n.3, pp. 231-245. DOI:10.1016/j.intfin.2005.02.004, Available at SSRN: https://ssrn.com/abstract=3629612

Amber Anand

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244
United States

Ahmet K Karagozoglu (Contact Author)

Hofstra University, Zarb School of Business ( email )

Department of Finance
148 Hofstra University
Hempstead, NY 11549-1480
United States
(516) 463-5701 (Phone)
(718) 701-8331 (Fax)

HOME PAGE: http://sites.hofstra.edu/ahmet-karagozoglu

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
128
PlumX Metrics