A Simple Way to Estimate Bid-Ask Spreads from Daily High and Low Prices

Corwin, Shane A.; Schultz, Paul H.

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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

See all articles by Shane A. Corwin

Shane A. Corwin

University of Notre Dame - Mendoza College of Business

Paul H. Schultz

University of Notre Dame - Department of Finance

Date Written: March 30, 2011

Abstract

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

Corwin, Shane A. and Schultz, Paul H., A Simple Way to Estimate Bid-Ask Spreads from Daily High and Low Prices (March 30, 2011). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1106193