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

Roll, Richard (1984) A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market. Journal of Finance, 39 (4). pp. 1127-1139. ISSN 0022-1082. doi:10.1111/j.1540-6261.1984.tb03897.x.

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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 Spread = √2−cov 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.

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Additional Information:© 1984 the American Finance Association. I am grateful for the thoughtful and constructive comments of Gordon Alexander, Eugene Fama, Dan Galai, Jon Ingersoll, Eduardo Lemgruber, Ron Masulis, Mark Rubinstein, and the referee.
Issue or Number:4
Record Number:CaltechAUTHORS:20190501-103050384
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Official Citation:ROLL, R. (1984), A Simple Implicit Measure of the Effective Bid‐Ask Spread in an Efficient Market. The Journal of Finance, 39: 1127-1139. doi:10.1111/j.1540-6261.1984.tb03897.x
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:95131
Deposited By: Tony Diaz
Deposited On:01 May 2019 18:59
Last Modified:16 Nov 2021 17:10

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