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This paper highlights the importance of timing specifications in empirical market microstructure studies. Small changes in the data matching process and the timing specification of economic variables can significantly alter the outcomes of empirical research. Using the methodology developed by Lee and Ready [1991. Journal of Finance 46(2) 733-746], we show that their "5-second rule" is not appropriate for matching quotes with transactions for NYSE stocks in the TAQ data set, and the prevailing quotes are the ones immediately before the trades. We demonstrate the significance of the timing specifications of economic variables using the Huang and Stoll [1997. Review of Financial Studies 10, 995-1034] spread decomposition model. Seemingly minor variations from the theoretical model result in severe biases in the estimated parameters. Correcting the timing errors provide much more realistic spread component estimates than those achieved in the literature. Crown Copyright © 2006.

This paper examines the price and volatility behaviour of two similar commodities (Brent Crude Oil and West Texas Intermediate) and attempts to identify the variables that affect their relative price differential. Price spreads and convenience yields are estimated in an effort to test a number of hypotheses relating to market segmentation, seasonality and maturity effect. Cash and futures price data covering the period 1991-1995 reveal that: convenience yields are significant and about 2.5% of cash prices on the average; convenience yields exhibit strong yearly and monthly seasonalities due to supply/demand imbalances; convenience yield is a negative function of the level of stocks and behaves like a call option; as maturity of futures contracts nears, their convenience yields get smaller, an indication that the maturity effect exists in futures prices, and crude oil price spreads are affected by convenience yields which act as surrogates for demand/supply conditions and market price behaviour.