Which Daily Price Is Less Noisy?

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 small...

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Main Author: TING, Christopher
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2006
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Online Access:https://ink.library.smu.edu.sg/lkcsb_research/1880
https://ink.library.smu.edu.sg/context/lkcsb_research/article/2879/viewcontent/Ting_2006_Financial_Management_DailyPriceNoisy.pdf
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spelling sg-smu-ink.lkcsb_research-28792017-04-19T09:30:44Z Which Daily Price Is Less Noisy? TING, Christopher 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. 2006-09-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/lkcsb_research/1880 info:doi/10.1111/j.1755-053X.2006.tb00148.x https://ink.library.smu.edu.sg/context/lkcsb_research/article/2879/viewcontent/Ting_2006_Financial_Management_DailyPriceNoisy.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Finance and Financial Management Portfolio and Security Analysis
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Finance and Financial Management
Portfolio and Security Analysis
spellingShingle Finance and Financial Management
Portfolio and Security Analysis
TING, Christopher
Which Daily Price Is Less Noisy?
description 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.
format text
author TING, Christopher
author_facet TING, Christopher
author_sort TING, Christopher
title Which Daily Price Is Less Noisy?
title_short Which Daily Price Is Less Noisy?
title_full Which Daily Price Is Less Noisy?
title_fullStr Which Daily Price Is Less Noisy?
title_full_unstemmed Which Daily Price Is Less Noisy?
title_sort which daily price is less noisy?
publisher Institutional Knowledge at Singapore Management University
publishDate 2006
url https://ink.library.smu.edu.sg/lkcsb_research/1880
https://ink.library.smu.edu.sg/context/lkcsb_research/article/2879/viewcontent/Ting_2006_Financial_Management_DailyPriceNoisy.pdf
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