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New Bid-Ask Spread Estimators from Daily High and Low Prices

Zhiyong Li (), Brendan Lambe and Emmanuel Adegbite

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we introduce two low frequency bid-ask spread estimators using daily high and low transaction prices. The range of mid-prices is an increasing function of the sampling interval, while the bid-ask spread and the relationship between trading direction and the mid-price are not constrained by it and are therefore independent. Monte Carlo simulations and data analysis from the equity and foreign exchange markets demonstrate that these models significantly out-perform the most widely used low-frequency estimators, such as those proposed in Corwin and Schultz (2012) and most recently in Abdi and Ranaldo (2017). We illustrate how our models can be applied to deduce historical market liquidity in NYSE, UK, Hong Kong and the Thai stock markets. Our estimator can also effectively act as a gauge for market volatility and as a measure of liquidity risk in asset pricing.

Keywords: High-low spread estimator; effective spread; transaction cost; market liquidity (search for similar items in EconPapers)
JEL-codes: C02 C13 C15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-mst and nep-ore
Date: 2017-05
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Journal Article: New bid-ask spread estimators from daily high and low prices (2018) Downloads
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