Corwin-Schultz Spread Estimator

Install and import

bash

npm install fintech-algorithms

import { corwinSchultzSpread } from "fintech-algorithms/market-microstructure/liquidity-and-spreads/corwin-schultz-spread-estimator";

Signature

corwinSchultzSpread(highDay1, lowDay1, highDay2, lowDay2, clipNegative)

Estimates the spread from daily high-low ranges over two days, exploiting that the range reflects both volatility and spread while volatility scales with time and the spread does not. Frequently returns negative values, which are theoretically impossible.

Parameters

Name	Type	Notes
`highDay1`	`number`	First day's high.
`lowDay1`	`number`	First day's low.
`highDay2`	`number`	Second day's high.
`lowDay2`	`number`	Second day's low.
`clipNegative`	`boolean`	Whether to clip negative estimates to zero. Corwin and Schultz recommend it; leaving them visible is more honest when averaging across a sample.

Returns

{ spread, raw_spread, beta, gamma, alpha, clipped }

The estimate with every intermediate, and whether clipping was applied.

Errors

When any high is below its low — throws

Complexity: time O(1), space O(1).

Worked example

executed Captured by running this function on the input its own test provides. Real output of real code — but not asserted against a published figure.

Input

highDay1

lowDay1

highDay2

101.5

lowDay2

99.5

clipNegative

true

Call

corwinSchultzSpread(highDay1, lowDay1, highDay2, lowDay2, clipNegative)

Returns

object with 9 fields: model, beta, gamma, alpha_raw, alpha_used, spread_estimate_relative, spread_estimate_bps, clip_negative, …

{
  "model": "corwin-schultz-spread",
  "beta": 0.0007960826118720654,
  "gamma": 0.0006219511446669105,
  "alpha_raw": 0.007908933752463966,
  "alpha_used": 0.007908933752463966,
  "spread_estimate_relative": 0.007908892526591878,
  "spread_estimate_bps": 79.08892526591879,
  "clip_negative": true,
  "state": "estimated"
}

Other exports

This module also exports quotedSpread, effectiveSpread, realizedSpread, rollSpread, amihudIlliquidity, calculate. Every module additionally exports run as an alias of its primary function, and a meta object carrying its catalog id, domain, family, shape and article URL.

Diagrams

Corwin-Schultz Spread Estimator — calculation map

Corwin-Schultz Spread Estimator — decision boundary

Corwin-Schultz Spread Estimator — failure boundary

Corwin-Schultz Spread Estimator — scenario matrix

Corwin-Schultz Spread Estimator — system map

How it works

This page states the contract — how to call it correctly. The article explains the concept: why it works, and where it breaks.

Read the article →

References

Corwin and Schultz (2012), A Simple Way to Estimate Bid-Ask Spreads — The Journal of Finance
NYSE Daily TAQ product description — New York Stock Exchange