Non-trading, market making, and estimates of stock price volatility

We examine the effects of market making and intermittent trading on estimates of stock price volatility. When observed price changes are correctly tied to a stock's true price dynamics, it is found that non-trading per se causes a loss of efficiency but no bias in traditional volatility estimat...

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Bibliographic Details
Published in:Journal of financial economics 1986-03, Vol.15 (3), p.359-372
Main Authors: Marsh, Terry A., Rosenfeld, Eric R.
Format: Article
Language:English
Subjects:
Bias
Economic theory
Efficiency
Estimates
Market economies
Mathematical models
Price level changes
Prices
Returns
Securities analysis
Securities markets
Stock
Stock prices
Volatility
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Summary:We examine the effects of market making and intermittent trading on estimates of stock price volatility. When observed price changes are correctly tied to a stock's true price dynamics, it is found that non-trading per se causes a loss of efficiency but no bias in traditional volatility estimates. Non-trading induces substancial inefficiency in the extreme value estimator of volatility which it biases downward. Market making's effects add to the non-trading induced inefficiency in the traditional estimator, while information trading causes a downward bias, and liquidity trading a potentially removable upward bias, in that estimator.
ISSN:0304-405X
1879-2774
DOI:10.1016/0304-405X(86)90026-7