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Estimation Bias Induced by Discrete Security Prices
Author(s) -
BALL CLIFFORD A.
Publication year - 1988
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1988.tb02608.x
Subject(s) - rounding , estimator , kurtosis , econometrics , volatility (finance) , variance (accounting) , probabilistic logic , mathematics , economics , statistics , computer science , accounting , operating system
Commonly, equilibrium security prices are modeled by continuous‐state stochastic processes, while observed prices are rounded into discrete units. This paper models the rounding mechanism and examines the probabilistic structure of the resultant rounded process. We provide accurate and simple estimates of the inflation in estimated variance and kurtosis induced by ignoring rounding. In particular, the maximum‐likelihood estimate of security price volatility using rounded prices is developed, and a simulation analysis is performed to examine the small‐sample properties of this estimator. For many practical applications, a simple correction for rounding becomes available.