Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/100677
Authors: 
Theissen, Erik
Zehnder, Lars Simon
Year of Publication: 
2014
Series/Report no.: 
CFR Working Paper 14-09
Abstract: 
It is a stylized fact that trade indicator models (e.g. Madhavan, Richardson, and Roomans (1997) and Huang and Stoll (1997)) underestimate the bid-ask spread. We argue that this negative bias is due to an endogeneity problem which is caused by a negative correlation between the arrival of public information and trade direction. In our sample (the component stocks of the DAX30 index) we find that the the average correlation between these variables is -0.193. We develop modified estimators and show that they yield essentially unbiased spread estimates.
Subjects: 
trade indicator model
information asymmetry
spread estimation
JEL: 
G14
G12
Document Type: 
Working Paper

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