Which Daily Price is Less Noisy?

16 Pages Posted: 19 Oct 2006

See all articles by Christopher Ting

Christopher Ting

Singapore Management University - Lee Kong Chian School of Business

Abstract

The daily efficient price is the price that would prevail if the market were frictionless. I show that volume-weighted average price (VWAP) provides a less noisy estimate for the unobservable efficient price as compared to the closing price. The variance of daily returns computed with VWAPs is smaller than that computed with closing prices. The difference between these two realized variances is economically significant. The volatility of log closing price change tends to understate the beta risk and Sharpe ratio. A higher noise level in the closing price leads to derivative prices that favor option and volatility-related swap writers.

Suggested Citation

Ting, Christopher, Which Daily Price is Less Noisy?. Financial Management, Vol. 35, No. 3, Autumn 2006, Available at SSRN: https://ssrn.com/abstract=938724

Christopher Ting (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford
Singapore, 178899
Singapore

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