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A Simple Implicit Measure of the Effective Bid‐Ask Spread in an Efficient Market
The Journal of Finance · 1984 · Vol. 39(4) · pp. 1127–1139
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.
Financial Markets and Investment StrategiesComplex Systems and Time Series AnalysisStochastic processes and financial applicationsAsk priceBid priceBid–ask spreadMeasure (data warehouse)EconometricsOrder (exchange)EconomicsSimple (philosophy)CovarianceValue (mathematics)
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References
The Cost of Transacting
The Quarterly Journal of Economics · 1968 · 1,902 citations
Introduction to Statistical Time Series
Technometrics · 1978 · 4,319 citations
EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK*
The Journal of Finance · 1970 · 15,646 citations
Efficient Capital Markets: A Review of Theory and Empirical Work
The Journal of Finance · 1970 · 13,039 citations
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