Articlehybrid1986

Non-trading, market making, and estimates of stock price volatility

56 citations0/0 files storedJournal of Financial Economics

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Financial Risk and Volatility Modeling Financial Markets and Investment Strategies Stochastic processes and financial applications

Abstract

We examine the effects of market making and intermittent trading on estimates of stock price volatility. When observed price changes are correctly tied to a stock's true price dynamics, it is found that non-trading per se causes a loss of efficiency but no bias in traditional volatility estimates. Non-trading induces substancial inefficiency in the extreme value estimator of volatility which it biases downward. Market making's effects add to the non-trading induced inefficiency in the traditional estimator, while information trading causes a downward bias, and liquidity trading a potentially removable upward bias, in that estimator.

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References

1973The Pricing of Options and Corporate Liabilities 1980Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?1973A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices 1977Estimating betas from nonsynchronous data 1984A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market 1980The Extreme Value Method for Estimating the Variance of the Rate of Return 1980On the Estimation of Security Price Volatilities from Historical Data 1981The Present-Value Relation: Tests Based on Implied Variance Bounds

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