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Which Daily Price Is Less Noisy?
Vol. 35, No. 3 (Autumn, 2006), pp. 81-95
Stable URL: http://www.jstor.org/stable/30137802
Page Count: 16
You can always find the topics here!Topics: Prices, Price efficiency, Statistical variance, Price changes, Simulations, Stock prices, Supernova remnants, Financial management, Average prices, Signal noise
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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.
Financial Management © 2006 Financial Management Association International