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A Simple Implicit Measure of the Effective Bid‐Ask Spread in an Efficient Market
Author(s) -
ROLL RICHARD
Publication year - 1984
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1984.tb03897.x
Subject(s) - ask price , bid price , bid–ask spread , measure (data warehouse) , econometrics , order (exchange) , economics , simple (philosophy) , covariance , value (mathematics) , market microstructure , microeconomics , financial economics , mathematics , computer science , statistics , monetary economics , market liquidity , data mining , philosophy , finance , epistemology , economy
In an efficient market, the fundamental value of a security fluctuates randomly. However, trading costs induce negative serial dependence in successive observed market price changes. In fact, given market efficiency, the effective bid‐ask spread can be measured by Spread = 2 − covwhere “cov” is the first‐order serial covariance of price changes. This implicit measure of the bid‐ask spread is derived formally and is shown empirically to be closely related to firm size.