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New low-frequency spread measures

Craig W. Holden

Journal of Financial Markets, 2009, vol. 12, issue 4, 778-813

Abstract: I develop new spread proxies that pick up on three attributes of the low-frequency (daily) data: (1) price clustering, (2) serial price covariance accounting for midpoint prices on no-trade days, and (3) the quoted spread that is available on no-trade days. I develop and empirically test two different approaches: an integrated model and combined models. I test both new and existing low-frequency spread measures relative to two high-frequency benchmarks (percent effective spread and percent quoted spread) on three performance dimensions: (1) higher individual firm correlation with the benchmarks, (2) higher portfolio correlation with the benchmarks, and (3) lower distance relative to the benchmarks. I find that on all three performance dimensions the new integrated model and the new combined model do significantly better than existing low-frequency spread proxies.

Keywords: Liquidity; Effective; spread; Transaction; cost; Asset; pricing; Market; efficiency (search for similar items in EconPapers)
Date: 2009
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