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

Published online by Cambridge University Press:  06 April 2009

J. Y. Choi ,
Dan Salandro  and
Kuldeep Shastri
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Abstract

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 2 , June 1988 , pp. 219 - 230
Copyright
Copyright © School of Business Administration, University of Washington 1988

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