Bid-Ask Bias in Cumulated Returns: An Analytical Approach

European Financial Management

Posted: 9 Jan 1998

See all articles by Narayan Y. Naik

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Vinay T. Datar

Seattle University

Multiple version iconThere are 2 versions of this paper

Abstract

Several studies in Finance and Accounting literature have measured security returns subsequent to some economic events over long-horizons by cumulating the returns over time. It is well known that when single period returns are cumulated over long-horizons, the bid-ask error in the measured returns could be very high. One way of estimating the bid-ask error is by simulation. This paper offers an alternative to the simulation approach and provides a closed form expression for the bid-ask error in cumulated returns. Our analytical approach has two main advantages over the traditional simulation method: first it quantifies the bias precisely and second, it is computationally simpler by several orders of magnitude.

JEL Classification: G12, G14

Suggested Citation

Naik, Narayan Y. and Datar, Vinay T., Bid-Ask Bias in Cumulated Returns: An Analytical Approach. European Financial Management. Available at SSRN: https://ssrn.com/abstract=45210

Narayan Y. Naik (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

Vinay T. Datar

Seattle University ( email )

900 Broadway
Seattle, WA 98122
United States
206-296-2801 (Phone)
206-296-2486 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
642
PlumX Metrics