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

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. © 2012 The American Finance Association.