Using matched samples to test for differences in trade execution costs

Ryan Davies and Sang Soo Kim

Journal of Financial Markets, 2009, vol. 12, issue 2, 173-202

Abstract: 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 (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1386-4181(08)00023-2
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:12:y:2009:i:2:p:173-202

Access Statistics for this article

Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

More articles in Journal of Financial Markets from Elsevier
Bibliographic data for series maintained by Catherine Liu ().