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Statistical Properties of the Roll Serial Covariance Bid/Ask Spread Estimator

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  • Harris, Lawrence
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    Abstract

    Exact small sample population moments of the standard serial covariance and variance estimators are derived under the assumptions of the Roll bid/ask spread models. Noise explains why serial covariance estimates are often positive in annual samples of daily and weekly returns. Small sample estimator bias partially explains why weekly estimates are more negative than daily estimates. Noise causes the Roll spread estimator to be severely biased by Jensen's inequality. The French-Roll adjusted variance estimator is unbiased but noisy. Empirical tests confirm the major implications. Copyright 1990 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 45 (1990)
    Issue (Month): 2 (June)
    Pages: 579-90

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    Handle: RePEc:bla:jfinan:v:45:y:1990:i:2:p:579-90

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    Cited by:
    1. Stoll, Hans R. & Schenzler, Christoph, 2006. "Trades outside the quotes: Reporting delay, trading option, or trade size?," Journal of Financial Economics, Elsevier, vol. 79(3), pages 615-653, March.
    2. Kutas, Gábor & Végh, Richárd, 2005. "A Budapest Likviditási Mérték bevezetéséről. A magyar részvények likviditásának összehasonlító elemzése a budapesti, a varsói és a londoni értéktőzsdéken
      [Introduction of the Bu
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 686-711.
    3. Yacine A\"it-Sahalia & Jialin Yu, 2009. "High frequency market microstructure noise estimates and liquidity measures," Papers 0906.1444, arXiv.org.
    4. Lesmond, David A. & Schill, Michael J. & Zhou, Chunsheng, 2004. "The illusory nature of momentum profits," Journal of Financial Economics, Elsevier, vol. 71(2), pages 349-380, February.
    5. Aït-Sahalia, Yacine & Mykland, Per A. & Zhang, Lan, 2011. "Ultra high frequency volatility estimation with dependent microstructure noise," Journal of Econometrics, Elsevier, vol. 160(1), pages 160-175, January.
    6. Bekaert, Geert & Harvey, Campbell & Lundblad, Christian T., 2006. "Liquidity and Expected Returns: Lessons from Emerging Markets," CEPR Discussion Papers 5946, C.E.P.R. Discussion Papers.
    7. Liang Peng & Rainer Schulz, 2013. "Does the Diversification Potential of Securitized Real Estate Vary Over Time and Should Investors Care?," The Journal of Real Estate Finance and Economics, Springer, vol. 47(2), pages 310-340, August.
    8. Richard W. Kopcke & Francis M. Vitagliano & Zhenya S. Karamcheva, 2009. "Fees and Trading Costs of Equity Mutual Funds in 401(k) Plans and Potential Savings from ETFS and Commingled Trusts," Working Papers, Center for Retirement Research at Boston College wp2009-27, Center for Retirement Research, revised Nov 2009.
    9. Karnaukh, Nina & Ranaldo, Angelo & Söderlind, Paul, 2013. "Understanding FX Liquidity," Working Papers on Finance 1315, University of St. Gallen, School of Finance.
    10. Yadav, Pradeep K. & Bardong, Florian & Bartram, Söhnke M., 2009. "Informed trading, information asymmetry and pricing of information risk: Empirical evidence from the NYSE," CFR Working Papers 09-08, University of Cologne, Centre for Financial Research (CFR).
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    12. Yacine Ait-Sahalia & Jialin Yu, 2008. "High Frequency Market Microstructure Noise Estimates and Liquidity Measures," NBER Working Papers 13825, National Bureau of Economic Research, Inc.
    13. Fohlin, Caroline & Gehrig, Thomas, 2006. "Trading Costs in Early Securities Markets: The Case of the Berlin Stock Exchange, 1880-1910," CEPR Discussion Papers 5827, C.E.P.R. Discussion Papers.
    14. Dimitri Vayanos & Jiang Wang, 2012. "Market Liquidity - Theory and Empirical Evidence," FMG Discussion Papers dp709, Financial Markets Group.
    15. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
    16. Lin, Ji-Chai & Singh, Ajai K. & Yu, Wen, 2009. "Stock splits, trading continuity, and the cost of equity capital," Journal of Financial Economics, Elsevier, vol. 93(3), pages 474-489, September.
    17. Gianluca Marcato & Charles Ward, 2006. "Back from Beyond the Bid-Ask Spread: Perspectives on Liquidity," Real Estate & Planning Working Papers rep-wp2006-15, Henley Business School, Reading University.
    18. Ødegaard, Bernt Arne, 2009. "The (implicit) cost of equity trading at the Oslo Stock Exchange. What does the data tell us?," UiS Working Papers in Economics and Finance 2009/17, University of Stavanger.

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