We analyze the performance of five different methods appearing in the market microstructure literature in predicting effectiv e and quoted bid-ask spreads (Roll, LOT Mixed, Effective Tick, High-Low and Closing Percent Quoted Spread proxies). With data from index futures, currency futures and gold futures traded in Borsa Istanbul and taking percent effective and percent quoted spreads obtained from intraday trade and quote data as benchmarks, we calculate and compare the correlations and root mean square errors of the spread measures. Results show that none of the proxies is successful enough in estimating effective or quoted spread although under normal mar ket conditions, Effective Tick appears to perform best.
This paper provides an exhaustive review and categorization of market liquidity measures that are used to quantify liquidity in empirical research. We review and discuss these measures in a comparative manner in terms of market, data features, computational ease, predictiveness, and potentiality. With a primary focus on high‐frequency liquidity measurement, we highlight their advantages, limitations, and extensions. We conclude that high‐frequency measures concentrate around bid–ask spread and limit order book, the latter offering a richer ground for analysis. Moreover, considering the recent developments in the industry such as market fragmentation, abundance of data, and improved technology, the practicality of these measures are challenged.
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