Trading Costs and Returns for U.S. Equities: Estimating Effective Costs from Daily Data

Joel Hasbrouck

The Journal of Finance · 2009 · 1.1K citations · 44 references

Concepts

TL;DR

The effective cost of trading is usually estimated from transaction‐level data. This study proposes a Gibbs estimate based on daily closing prices. The Gibbs estimate uses daily closing prices to infer effective trading costs. The daily Gibbs estimate correlates 0.965 with transaction‐level estimates and, when used in asset pricing models, shows that effective cost is positively related to stock returns, strongest in January and distinct from size effects.

Abstract

ABSTRACT The effective cost of trading is usually estimated from transaction‐level data. This study proposes a Gibbs estimate that is based on daily closing prices. In a validation sample, the daily Gibbs estimate achieves a correlation of 0.965 with the transaction‐level estimate. When the Gibbs estimates are incorporated into asset pricing specifications over a long historical sample (1926 to 2006), the results suggest that effective cost (as a characteristic) is positively related to stock returns. The relation is strongest in January, but it appears to be distinct from size effects.

References

44