On the Estimation of Bid-Ask Spreads: Theory and Evidence

On the Estimation of Bid-Ask Spreads: Theory and Evidence

This paper extends the Roll model for implicit bid-ask spreads by incorporating the possibility of serial correlation in transaction type. The validity of this formula is examined using intra-day transactions and bid-ask spread data for options traded on the Chicago Board Options Exchange. The resul...

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Veröffentlicht in:Journal of financial and quantitative analysis 1988-06, Vol.23 (2), p.219-230
Hauptverfasser: Choi, J. Y., Salandro, Dan, Shastri, Kuldeep
Format: Artikel
Sprache:eng
Schlagworte:
Analytical estimating
Asked price
Bid price
Conditional probabilities
Correlations
Covariance
Estimators
Financial transactions
Market prices
Mathematical analysis
Mathematical models
Maximum likelihood estimation
Price changes
Quantitative analysis
Regression analysis
Serial
Spread
Studies
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Beschreibung
Zusammenfassung:This paper extends the Roll model for implicit bid-ask spreads by incorporating the possibility of serial correlation in transaction type. The validity of this formula is examined using intra-day transactions and bid-ask spread data for options traded on the Chicago Board Options Exchange. The results indicate that the model derived here closely estimates the effective bid-ask spread in that it explains more than 80 percent of the crosssectional differences in announced bid-ask spreads.
ISSN:0022-1090
1756-6916
DOI:10.2307/2330882