Trading Strategies and the Frequency of Time-Series

Abstract

We consider a linear model of stock returns derived from equilibrium analysis
and study how trading strategy of a marginal investor affects the relation between estimates of the moments of stock returns and measuring frequency. Subject to the impact of the stock allocations of the marginal investor on the stock price, the rate of her trading to the optimal allocations and the amount of idiosyncratic risk, the estimates of the moments of stock returns may significantly change with measuring frequency. This change for the standard deviation of the conditional Sharpe ratio could be in tens of times stronger than for unconditional moments of stock returns.

Keywords: Reversal; high frequency data; estimates of stock return

JEL Classification: C01, C15, C18, C22, C83