Estimation of the bid/ask spread on Danish stocks, an evaluation of Roll's estimator

Abstract

This paper presents the first empirical study of the bid/ask spread based on intra-daily transactions data from the Danish stock market. The technique developed by Roll (1984) for inferring the bid/ask spread is implemented and evaluated on samples of data from January, February and March 1993. In particular, since quoted spreads are available, it is possible to make a direct evaluation of the Roll estimator. The conclusion of the paper is twofold. First, the Roll estimator captures a large part of the actual quoted spread. Secondly, the average Danish bid/ask spread is larger than the 0.3% presented by Roll for the US market.