Faculty of Business, University of Alberta. My thanks to S. Beveridge, D. Fowler, B. Hsu, J. D. Jobson, A. Karolyi, Y. Kim, and especially T. Sydoryk and H. Turtle.
Corrections for Trading Frictions in Multivariate Returns
Article first published online: 30 APR 2012
1989 The American Finance Association
The Journal of Finance
Volume 44, Issue 5, pages 1421–1434, December 1989
How to Cite
KORKIE, B. (1989), Corrections for Trading Frictions in Multivariate Returns. The Journal of Finance, 44: 1421–1434. doi: 10.1111/j.1540-6261.1989.tb02663.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
When observed stock returns are obtained from trades subject to friction, it is known that an individual stock's beta and covariance are measured with error. Univariate models of additive error adjustment are available and are often applied simultaneously to more than one stock. Unfortunately, these multivariate adjustments produce non-positive definite covariance and correlation matrices, unless the return sample sizes are very large. To prevent this, restrictions on the adjustment matrix are developed and a correction is proposed, which dominates the uncorrected estimator. The estimators are illustrated with asset opportunity set estimates where daily returns have trading frictions.