Abstract

http://ssrn.com/abstract=1667151
 
 

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Noisy Prices and Inference Regarding Returns


Elena N. Asparouhova


University of Utah - David Eccles School of Business

Hendrik Bessembinder


University of Utah - Department of Finance

Ivalina Kalcheva


University of California, Riverside - University of California, Riverside

October 8, 2011

The Journal of Finance (JF), Forthcoming

Abstract:     
Temporary deviations of trade prices from fundamental values impart bias to estimates of mean returns to individual securities, to differences in mean returns across portfolios, and to parameters estimated in return regressions. We consider a number of corrections, and show them to be effective under reasonable assumptions. In an application to CRSP monthly returns, the corrections indicate significant biases in uncorrected return premium estimates associated with an array of firm characteristics. The bias can be large in economic terms, e.g., equal to 50% or more of the corrected estimate for firm size and share price.

Number of Pages in PDF File: 89

Keywords: Microstructure Noise, Illiquidity, Asset Pricing, Return Premium

JEL Classification: G1, G2

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Date posted: August 29, 2010 ; Last revised: October 10, 2011

Suggested Citation

Asparouhova, Elena N. and Bessembinder, Hendrik and Kalcheva, Ivalina, Noisy Prices and Inference Regarding Returns (October 8, 2011). The Journal of Finance (JF), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1667151

Contact Information

Elena N. Asparouhova
University of Utah - David Eccles School of Business ( email )
1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
Hendrik (Hank) Bessembinder (Contact Author)
University of Utah - Department of Finance ( email )
David Eccles School of Business
Salt Lake City, UT 84112
United States
Ivalina Kalcheva
University of California, Riverside - University of California, Riverside ( email )
900 University Avenue
Riverside, CA 92521
United States
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