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New Low-Frequency Spread Measures

46 Pages Posted: 28 May 2009 Last revised: 2 Sep 2017

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance

Date Written: May 26, 2009

Abstract

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

Holden, Craig W., New Low-Frequency Spread Measures (May 26, 2009). Journal of Financial Markets, Vol. 12, No. 778-813, 2009. Available at SSRN: https://ssrn.com/abstract=1410758 or http://dx.doi.org/10.2139/ssrn.1410758

Craig W. Holden (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)

HOME PAGE: http://www.kelley.iu.edu/cholden

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