The high–low spread estimator is not well–behaved in commodity markets

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.

Name thesis:degree_name

M.S.

Level thesis:degree_level

Thesis

Discipline thesis:degree_discipline

Agricultural & Applied Econ

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2018

Author dc:creator

• Tremacoldi Rossi, Pedro

Contributors dc:contributor

• Irwin, Scott H.
• Garcia, Philip
• Robe, Michel A
• Serra Devesa, Maria Teresa

• Commodity futures
• Bid-ask spreads
• Transaction costs

Statement dc:rights

• Copyright 2017 Pedro Tremacoldi Rossi

Language dc:language

eng

Handle dc:identifier

http://hdl.handle.net/2142/99420

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/99420