Bias in the Effective Bid-Ask Spread

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Department
Research Seminars in Finance

Topic: Bias in the Effective Bid-Ask Spread

Speaker: Björn Hagströmer, Stockholm University

Abstract: The effective bid-ask spread measured relative to the spread midpoint overstates the true effective bid-ask spread in markets with discrete prices and elastic liquidity demand. The average bias is 13--18% for S&P 500 stocks in general, depending on the estimator used as benchmark, and up to 97% for low-priced stocks. Cross-sectional bias variation across stocks, trading venues, and investor groups can influence research inference. The use of the midpoint also undermines liquidity timing and trading performance evaluations, and can lead non-sophisticated investors to overpay for liquidity. To overcome these problems, the paper proposes new estimators of the effective bid-ask spread.

View paper

Moderator: Ester Felez Vinas, University of Technology Sydney

Date: Wednesday, 30th September 2020
Time: 5-6 pm (Australian Eastern Standard Time)
Venue: This is on online Zoom webinar.

Seminar protocols:

• The webinar will run for 45 minutes, followed by a 15 minute Q&A session.
• There will be a moderator for each seminar event, who will facilitate communication and resolve any technical issues.
• Participants can use the chat facility or raise their had to ask questions during the presentation. The moderator will then alert the speaker at the appropriate time and either ask the questions raised or unmute the participant so they can ask the question directly to the presenter.

Co-ordinator: Harry Scheule

Enquiries: Duncan Ford