Bid-Ask Bias in Cumulated Returns: An Analytical Approach

European Financial Management, Vol 4, 1 March 1998

Posted: 5 May 1998

See all articles by Vinay T. Datar

Vinay T. Datar

Seattle University

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

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Abstract

Several studies in Finance and Accounting literature have measured security returns subsequent to some economic event. It is well known that when single period returns are cumulated over long horizons, the bid-ask bias in the measured returns could be very high. One way of estimating the bid-ask bias is by simulation. This paper offers an alternative to the simulation approach and provides a closed form expression for the bid-ask bias 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: G14

Suggested Citation

Datar, Vinay T. and Naik, Narayan Y., Bid-Ask Bias in Cumulated Returns: An Analytical Approach. European Financial Management, Vol 4, 1 March 1998. Available at SSRN: https://ssrn.com/abstract=83870

Vinay T. Datar (Contact Author)

Seattle University ( email )

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

Narayan Y. Naik

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)

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