Forecasting the intra-day effective bid ask spread by combining density forecasts

Malick Fall, Waël Louhichi and Jean Laurent Viviani

Applied Economics, 2021, vol. 53, issue 50, 5772-5792

Abstract: The bid-ask spread refers to the tightness dimension of liquidity and can be used as a proxy for transaction costs. Despite the importance of the bid-ask spread in the financial literature, few studies have investigated its forecastability. We propose a new methodology to predict the bid ask spread by combining density forecasts of two types of models: Multiplicative Errors Models and ARMA-GARCH models. Our method is employed to predict the effective intra-day bid-ask spread series of all shares pertaining to the CAC40 index. Using a one-step-ahead out-of-sample framework, we resort on the Model Confidence Set procedure to classify models and we found that the proposed model appears to beat all the benchmark specifications.

Date: 2021
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/00036846.2021.1929821 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:applec:v:53:y:2021:i:50:p:5772-5792

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036846.2021.1929821

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().