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Journal of Finance Vol. 67 No. 2 2012

A Simple Way to Estimate Bid‐Ask Spreads from Daily High and Low Prices

Shane A. Corwin1,2; Paul Schultz2,3

1 University of Mendoza · 2 University of Notre Dame · 3 Ministry of the Environment

open access

Abstract

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.

DOI
10.1111/j.1540-6261.2012.01729.x
Volume
67
Issue
2
Pages
719-760
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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