46 Pages Posted: 28 May 2009
Date Written: May 26, 2009
I develop new spread proxies that pick up on three attributes of the low-frequency (daily) data: (1) price clustering, (2) serial price covariance accounting for midpoint prices on no-trade days, and (3) the quoted spread which is available on no-trade days. I develop and empirically test two different approaches: an integrated model and combined models. I test both new and existing low-frequency spread measures relative to two high-frequency benchmarks (percent effective spread and percent quoted spread) on three performance dimensions: (1) higher individual firm correlation with the benchmarks, (2) higher portfolio correlation with the benchmarks, or (3) lower distance relative to the benchmarks. I find that on all three performance dimensions the new integrated model and the new combined model do significantly better than existing low-frequency spread proxies.
Keywords: Liquidity, effective spread, transaction cost, asset pricing, market efficiency
JEL Classification: C15, G12, G20
Suggested Citation: Suggested Citation