Efficient Estimation of Bid-Ask Spreads from Open, High, Low, and Close Prices

65 Pages Posted: 26 Jul 2021 Last revised: 20 May 2024

See all articles by David Ardia

David Ardia

HEC Montreal - Department of Decision Sciences

Emanuele Guidotti

University of Lugano - Institute of Finance

Tim Alexander Kroencke

FHNW School of Business

Date Written: July 23, 2021

Abstract

Popular bid-ask spread estimators are downward biased when trading is infrequent. Moreover, they consider only a subset of open, high, low, and close prices and neglect potentially useful information to improve the spread estimate. By accounting for discretely observed prices, this paper derives asymptotically unbiased estimators of the effective bid-ask spread. Moreover, it combines them optimally to minimize the estimation variance and obtain an efficient estimator. Through theoretical analyses, numerical simulations, and empirical evaluations, we show that our efficient estimator dominates other estimators from transaction prices, yields novel insights for measuring bid-ask spreads, and has broad applicability in empirical finance.

Keywords: bid-ask spread, transaction costs, asset pricing, trading frictions, market liquidity

JEL Classification: C10, C13, G12, G14

Suggested Citation

Ardia, David and Guidotti, Emanuele and Kroencke, Tim Alexander, Efficient Estimation of Bid-Ask Spreads from Open, High, Low, and Close Prices (July 23, 2021). Available at SSRN: https://ssrn.com/abstract=3892335 or http://dx.doi.org/10.2139/ssrn.3892335

David Ardia

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

Emanuele Guidotti (Contact Author)

University of Lugano - Institute of Finance ( email )

Lugano
Switzerland

Tim Alexander Kroencke

FHNW School of Business ( email )

Peter Merian-Strasse 86
Basel, 4002
Switzerland

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