hard · Market Microstructure spread-econ
An analyst computes the Corwin-Schultz (2012) high-low spread estimator, which infers the spread from the ratio of the sum of two single-day high-low log-range squares to the high-low log-range over a consecutive two-day window, exploiting that the high-low range reflects both true volatility and the bid-ask bounce, while volatility scales with the time interval but the spread does not. The stock experiences a large overnight price jump (a true value gap) with the market closed between the two days.
Holding the actual spread constant, how does this overnight jump most likely affect the estimator?
- It biases the estimate upward, because the jump inflates the two-day combined range more than the sum of single-day ranges, and the estimator misattributes the extra range to a wider spread.
- It biases the estimate downward, because the jump enlarges each single-day range, raising the volatility term that the estimator nets out and leaving a smaller residual spread.
- It leaves the estimate unbiased, because the estimator differences out any common multiplicative shock to both the single-day and two-day ranges by construction.
- It makes the estimate negative and the formula sets it to zero, because overnight gaps always drive the range ratio below the no-spread benchmark.
Sign up free to see the explanation and track your rank →
More Market Microstructure spread-econ practice
- If the dealer uses a quote shading parameter of κ = 0.00004 to manage inventory, what is t
- In the Avellaneda-Stoikov model, a market maker who is currently 'long' a significant amou
- A stock has a daily price volatility of 1%. If a trader uses the Roll model and finds that
- Suppose the NBBO for GHI is $100.00 Bid × $100.05 Ask. A mar… — How will they likely 'shad
- If a stock's effective spread is $0.06 and the 5-minute realized spread for the same trade
- According to Roll's model, if the autocovariance of price changes for a stock is -0.0075
- If the market maker applies quote shading with a parameter κ = 0.0001, how will they adjus
- Using Roll's estimator, what is the estimated bid-ask spread?