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EMPIRICAL EVIDENCE ON THE IMPACT OF THE BID‐ASK SPREAD ON THE CHARACTERISTICS OF CRSP DAILY RETURNS
Author(s) -
Venkatesh P. C.
Publication year - 1992
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1992.tb00792.x
Subject(s) - bid–ask spread , bid price , ask price , economics , transaction cost , volatility (finance) , financial economics , econometrics , stock (firearms) , stock exchange , price discovery , monetary economics , business , market liquidity , finance , futures contract , mechanical engineering , engineering
It is widely recognized that Center for Research in Security Prices (CRSP) returns may differ from “true” returns because of the bid‐ask effect. Using a large sample of New York Stock Exchange and American Stock Exchange securities, I confirm a discernible bid‐ask effect, the magnitude and importance of which decrease with the security's price level (increase with the spread). I find volatility estimates using CRSP returns to be greater than those based on quote returns. However, market model properties, such as β and R 2 , are generally unaffected. Bid‐ask effects are clearly apparent in event studies, but because of certain offsetting effects commonly used test statistics remain unaffected. Low‐priced stocks (below $2.00) do not conform to these patterns. Finally, the evidence raises the possibility that the existing literature on filter rule tests may underestimate the bid‐ask spread component of transaction costs.