A Simple Way to Estimate Bid-Ask Spreads from Daily High and Low Prices
Journal of Finance, Forthcoming
54 Pages Posted: 17 Mar 2008 Last revised: 14 Jul 2011
Date Written: March 30, 2011
We develop a bid-ask spread estimator from daily high and low prices. Daily high (low) prices are almost always buy (sell) trades. Hence, the high-low ratio reflects both the stock’s variance and its bid-ask spread. While the variance component of the high-low ratio is proportional to the return interval, the spread component is not. This allows us to derive a spread estimator as a function of high-low ratios over one-day and two-day intervals. The estimator is easy to calculate, can be applied in a variety of research areas, and generally outperforms other low-frequency estimators.
Keywords: bid-ask spreads, event studies, high prices, low prices
JEL Classification: C10, C13, G12, G14
Suggested Citation: Suggested Citation