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AN IMPLICIT MEASURE OF THE EFFECTIVE BID‐ASK SPREAD: A NOTE
Author(s) -
Chang Carolyn W.,
Chang Jack S. K.
Publication year - 1993
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1993.tb00128.x
Subject(s) - measure (data warehouse) , ask price , interval (graph theory) , bid price , order (exchange) , mathematics , econometrics , bid–ask spread , zero (linguistics) , statistics , computer science , economics , data mining , monetary economics , combinatorics , finance , market liquidity , linguistics , philosophy , economy
We extend Roll's study of the effective bid‐ask spread in an efficient market environment by allowing for serially correlated order arrival and quote behavior. This extension results in a more general effective bid‐ask spread measure, which precludes imaginary spreads and includes Roll's measure as a special case when the serial correlation is zero. This new measure is related to the length of the measurement interval due to the serial correlation, and thus has the potential to explain the previously observed differential between weekly and daily derived spreads.