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As you know, most of the EOD data available have only OHLC price. I used to do back-testing using the Close price as both bid and ask. however, in real world, the bid and ask spread is huge and the bid/ask quantity is also never constant. Above that, the bid/ask price changes with every shares sold/bought. Therefore, my earlier back-test could never be implement in the real world. What approach should i do to get/estimate ask/bid price for backtesting for OHLC data?

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  • $\begingroup$ This is too broad. The answer is going to depend on what you're trading (stocks, ETFs, futures, options, etc), the liquidity of what you're trading (bid/ask is not always huge; some markets are deeper than others), the quantity you want to trade, etc. $\endgroup$ – Joshua Ulrich Jul 15 '13 at 18:53
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If you want to backtest with closing prices, the best bet is to add a slippage to the trade price. Note, however, that transaction cost modeling is a large field within quantitative finance and there is no simple solution to estimate this.

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There is a recent paper with a procedure to estimated the bid/ask spread from a series of daily high/low prices. Link: http://www3.nd.edu/~scorwin/papers/high-low_spreads.pdf

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