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Noisy Prices and Inference Regarding Returns

89 Pages Posted: 29 Aug 2010 Last revised: 10 Oct 2011

Elena N. Asparouhova

University of Utah - David Eccles School of Business

Hendrik Bessembinder

Arizona State University

Ivalina Kalcheva

University of California, Riverside

Date Written: October 8, 2011

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.

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

JEL Classification: G1, G2

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: https://ssrn.com/abstract=1667151

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)

Arizona State University ( email )

PO Box 873906
Tempe, AZ 85207
United States

Ivalina Kalcheva

University of California, Riverside ( email )

900 University Avenue
Riverside, CA 92521
United States

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