A new estimate of transaction costs

Transaction costs are important for a host of empirical analyses from marke t efficiency to international market research. But transaction costs estima tes are not always available, or where available, are cumbersome to use and expensive to purchase. We present a model that requires only the time seri es of daily security returns to endogenously estimate the effective transac tion costs for any firm, exchange, or time period. The feature of the data that allows for the estimation of transaction costs is the incidence of zer o returns. Incorporating zero returns in the return-generating process, the model provides continuous estimates of average round-trip transaction cost s from 1963 to 1990 that are 1.2% and 10.3% for large and small decile firm s, respectively. These estimates are highly correlated (85%), with the most commonly used transaction cost estimators.