Efficient Estimation of Bid-Ask Spreads from Open, High, Low, and Close Prices
60 Pages Posted: 26 Jul 2021 Last revised: 16 Dec 2022
Date Written: July 23, 2021
Abstract
This paper formally derives an efficient estimator of the bid-ask spread from open,
high, low, and close prices. The estimator is asymptotically unbiased and optimally
combines the full set of price data to minimize the estimation variance. In absence of
quote data, it delivers the most accurate estimates of bid-ask spreads theoretically,
numerically, and empirically. The estimator is easy to calculate and has a broad
applicability in empirical finance. We show that our estimator changes inference in
typical empirical applications like the quantification of historical spreads, portfolio
sorts, or cross-sectional asset pricing tests.
Keywords: bid-ask spread, transaction costs, asset pricing, trading frictions, market liquidity
JEL Classification: C10, C13, G12, G14
Suggested Citation: Suggested Citation