When Do Low-Frequency Measures Really Measure Effective Spreads? Evidence from Equity and Foreign Exchange Markets

• 成果类型: Article
• 署名作者: Jahan-Parvar, Mohammad R.; Zikes, Filip
• 署名单位: Federal Reserve System - USA; Federal Reserve System Board of Governors
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhad028
• 发表日期: 2023
• 页码: 4190
• 关键词: bid-ask spreads; LIQUIDITY MEASUREMENT; microstructure noise; cross-section; stock returns; illiquidity; COSTS

摘要

We present evidence that several popular low-frequency measures of effective spread suffer from a volatility-induced bias and that volatility is the primary driver of the variation of these liquidity proxies. Using data for U.S. equities and major foreign exchange rates, we show that the bias arises when the effective spread is small relative to volatility. We document that the bias has become more acute over time and show that volatility-biased measures fail to replicate some well-known results in empirical finance. We conclude by providing guidance on the choice of low-frequency measures in empirical applications. Authors have furnished an , which is available on the Oxford University Press Web site next to the link to the final published paper online.