School of Business and Department of Statistics, University of Wisconsin-Madison. An earlier version of this paper has been presented at Boston University, Columbia University, Merrill Lynch, Northwestern University, Purdue University, Southern Methodist University, University of California-Riverside, University of Illinois, University of Southern California, University of Wisconsin-Madison, Vanderbilt University, the Actuarial Research Conference in Toronto, the European Finance Association Meetings in Madrid, and the American Finance Association Meetings in Chicago. We would like to thank participants of these workshops. We also would like to thank Lillyn Teh for her computational assistance.
Estimating the Volatility of Discrete Stock Prices
Article first published online: 30 APR 2012
1988 The American Finance Association
The Journal of Finance
Volume 43, Issue 2, pages 451–466, June 1988
How to Cite
CHO, D. C. and FREES, E. W. (1988), Estimating the Volatility of Discrete Stock Prices. The Journal of Finance, 43: 451–466. doi: 10.1111/j.1540-6261.1988.tb03949.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper introduces an estimator of stock price volatility that eliminates, at least asymptotically, the biases that are caused by the discreteness of observed stock prices. Assuming that the observed stock prices are continuously monitored, an estimator is constructed using the notion of how quickly the price changes rather than how much the price changes. It is shown that this estimator has desirable asymptotic properties, including consistency and asymptotic normality. Also, through a simulation study, the authors show that it outperforms natural estimators for the low- and middle-priced stocks. Furthermore, the simulation study demonstrates that the proposed estimator is robust to certain misspecifications in measuring the time between price changes.