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

Li, Zhiyong and Lambe, Brendan and Adegbite, Emmanuel (2017): New Bid-Ask Spread Estimators from Daily High and Low Prices.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: High-low spread estimator; effective spread; transaction cost; market liquidity
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General

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