Evaluation of the biases in execution cost estimation using trade and quote data |
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| Affiliation: | 1. School of Information and Control Engineering, China University of Mining and Technology, Xuzhou, Jiangsu 221116, P.R. China;2. School of Computer Science and Technology, Shandong Jianzhu University, Jinan, Shandong 250101, P.R. China;3. College of Information Science and Technology, Beijing University of Chemical Technology, Beijing 100029, P.R. China |
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| Abstract: | We use order data to assess the accuracy of execution cost estimation with trade and quote data. For our sample, estimates of the effective spread overstate actual execution costs by up to 17%. The biases result from errors in the inference of the trade direction and errors in the assignment of the benchmark quote. We find the accuracy of two popular trade direction algorithms improve marginally when trades are not lagged 5 seconds. Evaluation of the biases in execution cost measurement reveal the Ellis et al. (Journal of Financial and Quantitative Analysis (2000) 529) trade direction algorithm, combined with assigning benchmark quotes contemporaneous with trades, provides the least amount of bias. In general, biases are lower for relative effective spread estimates than effective spread estimates. |
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