Bid-Ask Bias in Cumulated Returns: An Analytical Approach
European Financial Management, Vol 4, 1 March 1998
Posted: 5 May 1998
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: Suggested Citation