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Estimation of linear regression models from bid-ask data by a spread-tolerant estimator

By Oliver Linton

Abstract

We investigate a class of estimators for linear regression models where the dependent variable is subject to bid-ask censoring. Our estimation method is based on a definition of error that is zero when the predictor lies between the actual bid price and ask price, and linear outside this range. Our estimator minimizes a sum of such squared errors; it is nonlinear, and indeed the criterion function itself is non-smooth. We establish its asymptotic properties using the approach of Pakes and Pollard (1989). We compare the estimator with midpoint OLS

Topics: HB Economic Theory
Publisher: Peking University Press
Year: 2001
OAI identifier: oai:eprints.lse.ac.uk:1111
Provided by: LSE Research Online
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