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A Simple Implicit Measure of the Effective Bid‐Ask Spread in an Efficient Market

A Simple Implicit Measure of the Effective Bid‐Ask Spread in an Efficient Market ABSTRACT 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 where “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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

A Simple Implicit Measure of the Effective Bid‐Ask Spread in an Efficient Market

The Journal of Finance , Volume 39 (4) – Sep 1, 1984

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References (12)

Publisher
Wiley
Copyright
1984 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1984.tb03897.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT 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 where “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.

Journal

The Journal of FinanceWiley

Published: Sep 1, 1984

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