Using Matched Samples to Test for Differences in Trade Execution Costs

45 Pages Posted: 3 Jun 2004

See all articles by Ryan J. Davies

Ryan J. Davies

Babson College - Finance Division

Sang Soo Kim

The Korea Development Bank

Multiple version iconThere are 2 versions of this paper

Date Written: July 13, 2007


This paper provides guidance on how to use matched samples to test for differences in trade execution costs (e.g. quoted and effective spreads). Based on extensive simulation results, we conclude that the best practice is to match firms one-to-one based on market capitalization and share price, and to test for differences between the matched pairs using a Wilcoxon signed rank test. We demonstrate that pre-sorting by industry groups or discarding apparent poor matches may reduce test power. We show that, in general, tests based on one-to-one nearest neighbor matching have comparable power and less size distortion than alternatives that place more weight on distant firms. We find that matching without replacement can reduce size distortion when the control sample is relatively small. We highlight conditions under which matched sample estimation may be preferred to the corresponding event study.

Keywords: Matched samples, market microstructure, bid-ask spreads

JEL Classification: G10

Suggested Citation

Davies, Ryan J. and Kim, Sang Soo, Using Matched Samples to Test for Differences in Trade Execution Costs (July 13, 2007). Available at SSRN: or

Ryan J. Davies (Contact Author)

Babson College - Finance Division ( email )

220 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-5345 (Phone)
781-239-5004 (Fax)


Sang Soo Kim

The Korea Development Bank ( email )

16-3, Yeouido-dong
Korea, Republic of (South Korea)
+822 787 7303 (Phone)
+822 787 7391 (Fax)

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