A Simple Estimation of Bid-Ask Spreads from Daily Close, High, and Low Prices

53 Pages Posted: 2 Feb 2016 Last revised: 30 Jul 2017

See all articles by Farshid Abdi

Farshid Abdi

Texas A&M University

Angelo Ranaldo

University of St. Gallen; Swiss Finance Institute

Date Written: April 2017

Abstract

We propose a new method to estimate the bid-ask spread when quote data are not available. Compared to other low-frequency estimates, this method utilizes a wider information set, namely, readily available close, high, and low prices. In the absence of end-of-day quote data, this method generally provides the highest cross-sectional and average time-series correlations with the TAQ effective spread benchmark. Moreover, it delivers the most accurate estimates for less liquid stocks. Our estimator has many potential applications, including an accurate measurement of transaction cost, systematic liquidity risk, and commonality in liquidity for U.S. stocks dating back almost one century.

The appendix to "A Simple Estimation of Bid-Ask Spreads from Daily Close, High, and Low Prices" to is available at the following URL: http://ssrn.com/abstract=2809692.

Keywords: Market liquidity, Transaction cost, Effective spread, TAQ data, Asset pricing

JEL Classification: G15, G12, G20

Suggested Citation

Abdi, Farshid and Ranaldo, Angelo, A Simple Estimation of Bid-Ask Spreads from Daily Close, High, and Low Prices (April 2017). Forthcoming, Review of Financial Studies, University of St. Gallen, School of Finance Research Paper 2016/04, Available at SSRN: https://ssrn.com/abstract=2725981 or http://dx.doi.org/10.2139/ssrn.2725981

Farshid Abdi (Contact Author)

Texas A&M University ( email )

Mays Business School | Texas A&M University
210 Olsen Boulevard
College Station, TX 77843-4218
United States

Angelo Ranaldo

University of St. Gallen ( email )

School of Finance
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://fin-sr.unisg.ch

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41796637711 (Phone)

HOME PAGE: http://www.sfi.ch/de/about-us/news/hsg-faculty-members

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