Publication Type
Journal Article
Version
acceptedVersion
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
Citation
TING, Christopher.
Which Daily Price Is Less Noisy?. (2006). Financial Management. 35, (3), 81-95.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/1880
Copyright Owner and License
Author
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1111/j.1755-053X.2006.tb00148.x