Gottlieb from Graduate School of Business Administration, New York University, and Kalay from Recanati Graduate School of Business, Tel Aviv, and Graduate School of Business Administration, New York University. We are grateful to R. Ambarish, K. Garbade, S. Kon, K. Vandezande, and especially to the referee and an Associate Editor of this Journal for many helpful comments. Avner Kalay acknowledges support by a New York University Summer Research Grant.
Implications of the Discreteness of Observed Stock Prices
Article first published online: 30 APR 2012
1985 The American Finance Association
The Journal of Finance
Volume 40, Issue 1, pages 135–153, March 1985
How to Cite
GOTTLIEB, G. and KALAY, A. (1985), Implications of the Discreteness of Observed Stock Prices. The Journal of Finance, 40: 135–153. doi: 10.1111/j.1540-6261.1985.tb04941.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Stock prices on the organized exchanges are restricted to be divisible by ⅛. Therefore, the “true” price usually differs from the observed price. This paper examines the biases resulting from the discreteness of observed stock prices. It is shown that the natural estimators of the variance and all of the higher order moments of the rate of returns are biased. An approximate set of correction factors is derived and a procedure is outlined to show how the correction can be made. The natural estimators of the “beta” and of the variance of the market portfolio, on the other hand, are “nearly” unbiased.