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Title:The high–low spread estimator is not well–behaved in commodity markets
Author(s):Tremacoldi Rossi, Pedro
Advisor(s):Irwin, Scott H.
Contributor(s):Garcia, Philip; Robe, Michel A; Serra Devesa, Maria Teresa
Department / Program:Agr & Consumer Economics
Discipline:Agricultural & Applied Econ
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Commodity futures
Bid-ask spreads
Transaction costs
Abstract:In spite of the increasing availability of high-quality data and the possibility of obtaining direct commodity trading costs in recent periods, historical series of transaction costs still require bid-ask spread estimation. In this work, we verify whether the popular high-low spread estimator performs well in commodity markets so that it can be used to construct long-term cost estimates. We find that the estimator suffers both from measurement error increasing in the volatility-to-spread ratio and consistently positive error in a variety of empirical and experimental settings. As the measurement error in the high-low estimator depends on ex-ante knowledge about the usually unobserved true spread level, we conclude that the spread measure is not well-behaved and should be avoided in commodity markets.
Issue Date:2017-12-12
Rights Information:Copyright 2017 Pedro Tremacoldi Rossi
Date Available in IDEALS:2018-03-13
Date Deposited:2017-12

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