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

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