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What is Bias in Effective Bid-Ask Spread about?

This paper critiques the use of the midpoint effective bid-ask spread as a benchmark for measuring market illiquidity, demonstrating that it overstates true spreads, particularly in markets with discrete prices and varying liquidity demand. The average bias is found to be between 13% and 18% for S&P 500 stocks, with significantly higher biases for low-priced stocks, which can mislead investors and affect trading performance evaluations. The author proposes alternative estimators that better reflect true mar

Author

mumutine

Language

EN