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A Simple Way to Estimate Bid‐Ask Spreads from Daily High and Low Prices
Author(s) -
CORWIN SHANE A.,
SCHULTZ PAUL
Publication year - 2012
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.1540-6261.2012.01729.x
Subject(s) - estimator , bid price , ask price , econometrics , stock (firearms) , variance (accounting) , economics , mathematics , statistics , finance , engineering , accounting , mechanical engineering
We develop a bid‐ask spread estimator from daily high and low prices. Daily high (low) prices are almost always buy (sell) trades. Hence, the high–low ratio reflects both the stock's variance and its bid‐ask spread. Although the variance component of the high–low ratio is proportional to the return interval, the spread component is not. This allows us to derive a spread estimator as a function of high–low ratios over 1‐day and 2‐day intervals. The estimator is easy to calculate, can be applied in a variety of research areas, and generally outperforms other low‐frequency estimators.