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One-to-many matching: An alternative trading cost comparison technique

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  • Liu, Jerry W.
  • Wort, Donald H.

Abstract

We compare the relative merits of different matching techniques used in cross-market studies. Using the latest November 2007 data from both NASDAQ and the NYSE, we conduct simulations in which the firm characteristic distributions differ on the two matching sides. We keep the sample size small to create a difficult matching environment and highlight the relative strength of the different matching approaches. We propose a one-to-many matching method that has not been used previously in cross-market studies; each NASDAQ stock in our sample is matched with several comparable stocks from the NYSE. This method yields small matching errors than the widely used one-to-one matching process. Our simulation shows that choosing the best-matching technique actually matters. The one-to-many method consistently produces the correct result while the standard one-to-one without replacement method generates wrong answers under difficult matching environments.

Suggested Citation

  • Liu, Jerry W. & Wort, Donald H., 2009. "One-to-many matching: An alternative trading cost comparison technique," Global Finance Journal, Elsevier, vol. 20(1), pages 48-66.
    • Handle: RePEc:eee:glofin:v:20:y:2009:i:1:p:48-66
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    References listed on IDEAS

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    1. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
    2. Bessembinder, Hendrik, 2003. "Quote-based competition and trade execution costs in NYSE-listed stocks," Journal of Financial Economics, Elsevier, vol. 70(3), pages 385-422, December.
    3. Bessembinder, Hendrik & Kaufman, Herbert M., 1997. "A Comparison of Trade Execution Costs for NYSE and NASDAQ-Listed Stocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(3), pages 287-310, September.
    4. Bessembinder, Hendrik, 1999. "Trade Execution Costs on NASDAQ and the NYSE: A Post-Reform Comparison," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(3), pages 387-407, September.
    5. James P. Weston, 2000. "Competition on the Nasdaq and the Impact of Recent Market Reforms," Journal of Finance, American Finance Association, vol. 55(6), pages 2565-2598, December.
    6. Davies, Ryan J. & Kim, Sang Soo, 2009. "Using matched samples to test for differences in trade execution costs," Journal of Financial Markets, Elsevier, vol. 12(2), pages 173-202, May.
    7. Boehmer, Ekkehart, 2005. "Dimensions of execution quality: Recent evidence for US equity markets," Journal of Financial Economics, Elsevier, vol. 78(3), pages 553-582, December.
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    1. Leonie Herrmann, 2017. "Mittelstandsanleihen und ihre privaten Investoren [German SME-bonds and their private investors]," Schmalenbach Journal of Business Research, Springer, vol. 69(3), pages 245-273, September.

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