A New Estimate of Transaction Costs

Posted: 16 Nov 1999

See all articles by David A. Lesmond

David A. Lesmond

Tulane University - A.B. Freeman School of Business

Joseph P. Ogden

State University of New York (SUNY) at Buffalo - School of Management

Charles Trzcinka

Indiana University - Kelley School of Business - Department of Finance

Abstract

Transaction costs are important for a host of empirical analysis from market efficiency to international market research. But transaction costs estimates are not always available; or where available, cumbersome to use and expensive to purchase. We present a model that requires only the time series of daily security returns to endogenously estimate the effective transaction costs for any firm, exchange, or time period. The feature of the data that allows for the estimation of transaction costs is the incidence of zero returns. Incorporating zero returns in the return generating process, the model provides continuous estimates of average round-trip transaction costs from 1963 to 1990 that are 1.2% and 10.3% for large and small decile firms, respectively. These estimates are highly correlated (85%) with the most commonly used transaction costs estimator: spread-plus-commissions as used by Stoll and Whaley (1989) and Bhardwaj and Brooks (1992).

JEL Classification: G12, G14

Suggested Citation

Lesmond, David A. and Ogden, Joseph P. and Trzcinka, Charles, A New Estimate of Transaction Costs. Review of Financial Studies, Vol. 12, Iss. 5. Available at SSRN: https://ssrn.com/abstract=184681

David A. Lesmond (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
511 Goldring-Woldenberg Hall
New Orleans, LA 70118
United States
504-865-5665 (Phone)
504-865-6751 (Fax)

Joseph P. Ogden

State University of New York (SUNY) at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States
716-645-3270 (Phone)
716-645-3823 (Fax)

Charles Trzcinka

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

Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-9908 (Phone)
812-855-5875 (Fax)

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