New Bid-Ask Spread Estimators from Daily High and Low Prices

66 Pages Posted: 13 May 2017 Last revised: 22 Aug 2018

See all articles by Zhiyong Li

Zhiyong Li

University of Leicester

Brendan John Lambe

University of Leicester

Emmanuel Adegbite

University of Nottingham

Date Written: September 1, 2018

Abstract

Estimating trading costs in the absence of recorded data is a problem that continues to puzzle financial market researchers. We address this challenge by introducing two low frequency bid-ask spread estimators using daily high and low transaction prices. The range of mid-prices is an increasing function of the sampling interval, while the bid-ask spread and the relationship between trading direction and the mid-price are not constrained by it and are therefore independent. Monte Carlo simulations and data analysis from the equity and foreign exchange markets demonstrate that these models significantly out-perform the most widely used low-frequency estimators, such as those proposed in Corwin and Schultz (2012) and most recently in Abdi and Ranaldo (2017). Using real world data we show that one of our estimators (SHL2)’s root mean square error (RMSE) is almost less than a half (even 20%) of the competitors. We illustrate how our models can be applied to deduce historical market liquidity in US, UK, Hong Kong and the Thai stock markets. Our estimator can also effectively act as a gauge for market volatility and as a measure of liquidity risk in asset pricing.

Keywords: High-Low Spread Estimator, Effective Spread, Transaction Cost, Market Liquidity

JEL Classification: C02, C13, C15

Suggested Citation

Li, Zhiyong and Lambe, Brendan John and Adegbite, Emmanuel, New Bid-Ask Spread Estimators from Daily High and Low Prices (September 1, 2018). Available at SSRN: https://ssrn.com/abstract=2967117 or http://dx.doi.org/10.2139/ssrn.2967117

Zhiyong Li (Contact Author)

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Brendan John Lambe

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom
01162297420 (Phone)

Emmanuel Adegbite

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

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