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Measuring the Bid-Ask Spreads: Application to the European Union Allowances Futures Market

Author

Listed:
  • Yoichi Otsubo

    (LSF)

Abstract

This study provides a case that the Thompson Waller estimator would have downward bias, which has not been carefully discussed in the literature. Such case is that (i) the buy (sell) order tends to follow buy (sell) order and (ii) the price change associated to such orders are small. The upward bias of the TW estimator would be canceled out by the downward bias, and in such case the estimator would perform better than the other absolute price change methods. The application to the European Union Allowances futures contract trading implies that its trading pattern and the price change provide the conditions that reduce the bias of the Thompson-Waller estimator. Lastly, the Madhavan-Richardson-Roomans model is applied to examine the spread component of the market. A dominance of asymmetric information component in the spread is found. The fraction of the spread attributable to that component increases gradually during the observation period.

Suggested Citation

  • Yoichi Otsubo, 2012. "Measuring the Bid-Ask Spreads: Application to the European Union Allowances Futures Market," DEM Discussion Paper Series 12-6, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:12-6
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    File URL: http://wwwen.uni.lu/content/download/53130/634577/file/Measuring%20the%20Bid-Ask%20Spreads_Application%20to%20the%20European%20Union%20Allowances%20Futures%20Market_2012%20(6).pdf
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    More about this item

    Keywords

    carbon; bid-ask spreads; futures market; European Union Allowances;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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