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

  • RICHARD ROLL

Article first published online: 30th April 2012 DOI: 10.1111/j.1540-6261.1984.tb03897.x

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.

Sign in to access the full article.

Related articles


Arbitrage Pricing Theory and Utility Stock Returns

  • DOROTHY H. BOWER
  • RICHARD S. BOWER
  • DENNIS E. LOGUE

Article first published online: 30th April 2012 / DOI: 10.1111/j.1540-6261.1984.tb03891.x

Read Article

Bank Income Taxes and Interest Rate Risk Management: A Note

  • EITAN GUREL
  • DAVID PYLE

Article first published online: 30th April 2012 / DOI: 10.1111/j.1540-6261.1984.tb03903.x

Read Article

The Leasing Puzzle

  • JAMES ANG
  • PAMELA P. PETERSON

Article first published online: 30th April 2012 / DOI: 10.1111/j.1540-6261.1984.tb03892.x

Read Article

Comparing Time‐Series and Survey Forecasts of Weekly Changes in Money: A Methodological Note

  • R. W. HAFER

Article first published online: 30th April 2012 / DOI: 10.1111/j.1540-6261.1984.tb03904.x

Read Article

A Further Empirical Investigation of the Bankruptcy Cost Question

  • EDWARD I. ALTMAN

Article first published online: 30th April 2012 / DOI: 10.1111/j.1540-6261.1984.tb03893.x

Read Article

The Effects of Transaction Costs and Different Borrowing and Lending Rates on the Option Pricing Model: A Note

  • JOHN E. GILSTER
  • WILLIAM LEE

Article first published online: 30th April 2012 / DOI: 10.1111/j.1540-6261.1984.tb03905.x

Read Article

Are you an Author?


Please read our submission requirements and find out how to submit your paper to the Journal of Finance

Submit a paper