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

Tremacoldi Rossi, Pedro

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https://hdl.handle.net/2142/99420 Copy

Description

Title

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

Author(s)

Tremacoldi Rossi, Pedro

Issue Date

2017-12-12

Director of Research (if dissertation) or Advisor (if thesis)

Irwin, Scott H.

Committee Member(s)

• Garcia, Philip
• Robe, Michel A
• Serra Devesa, Maria Teresa

Department of Study

Agr & Consumer Economics

Discipline

Agricultural & Applied Econ

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

M.S.

Degree Level

Thesis

Keyword(s)

• Commodity futures
• Bid-ask spreads
• Transaction costs

Abstract

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.

Graduation Semester

2017-12

Type of Resource

text

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

Copyright and License Information

Copyright 2017 Pedro Tremacoldi Rossi

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