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

Abstract

We propose a novel estimation procedure of bid-ask spreads from open, high, low, and close prices. Our estimator is asymptotically unbiased and optimally combines the full set of price data to minimize the estimation variance. When quote data are not available, our estimator generally delivers the most accurate estimates of effective bid-ask spreads numerically and empirically. The estimator is derived under permissive assumptions that allow for stylized facts typically observed in real market data, is easy to implement, and can be applied to liquid and illiquid market segments, both in low and high frequency.

Keywords: market liquidity, bid-ask spread, transaction cost, asset pricing

JEL Classification: C10, C13, G12, G14