Publication Type

Journal Article

Publication Date

9-2006

Abstract

The daily efficient price is the price that would prevail if the market were frictionless. I show that volume-weighted average price (VWAP) provides a less noisy estimate for the unobservable efficient price as compared to the closing price. The variance of daily returns computed with VWAPs is smaller than that computed with closing prices. The difference between these two realized variances is economically significant. The volatility of log closing price change tends to understate the beta risk and Sharpe ratio. A higher noise level in the closing price leads to derivative prices that favor option and volatility-related swap writers.

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Quantitative Finance

Publication

Financial Management

Volume

35

Issue

3

First Page

81

Last Page

95

ISSN

1755-053X

Identifier

10.1111/j.1755-053X.2006.tb00148.x

Publisher

Wiley

Copyright Owner and License

Author

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org/10.1111/j.1755-053X.2006.tb00148.x

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