Efficient estimation of bid–ask spreads from open, high, low, and close prices

David Ardia, Emanuele Guidotti and Tim A. Kroencke

Journal of Financial Economics, 2024, vol. 161, issue C

Abstract: Popular bid–ask spread estimators are downward biased when trading is infrequent. Moreover, they consider only a subset of open, high, low, and close prices and neglect potentially useful information to improve the spread estimate. By accounting for discretely observed prices, this paper derives asymptotically unbiased estimators of the effective bid–ask spread. Moreover, we combine them optimally to minimize the estimation variance and obtain an efficient estimator. Through theoretical analyses, numerical simulations, and empirical evaluations, we show that our efficient estimator dominates other estimators from transaction prices, yields novel insights for measuring bid–ask spreads, and has broad applicability in empirical finance.

Keywords: Bid–ask spread; Trading frictions; Transaction costs (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:161:y:2024:i:c:s0304405x24001399

DOI: 10.1016/j.jfineco.2024.103916

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