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Journal of Financial Economics Vol. 12 No. 2 1983

Friction in the trading process and the estimation of systematic risk

Kalman J. Cohen1; Gabriel Hawawini2; Steven F. Maier3,4; Robert A. Schwartz5; David K. Whitcomb6

1 Duke University · 2 INSEAD · 3 Durham Technical Community College · 4 North Carolina School of Science and Mathematics · 5 New York University · 6 Rutgers, The State University of New Jersey

Abstract

This paper considers how estimates of the market model beta parameter can be biased by friction in the trading process (information, decision, and transaction costs) that (a) leads to a distinction between observed and ‘true’ returns; (b) causes observed returns to be generated asynchronously for a set of interdependent securities; and (c) thereby introduces serial cross-correlation into security returns. Several propositions are derived from which consistent estimators of beta are obtained, and the effect of differencing interval length on beta estimates is specified. The formulation is contrasted with the related analyses of Scholes-Williams (1977) and Dimson (1979).

DOI
10.1016/0304-405x(83)90038-7
Volume
12
Issue
2
Pages
263-278
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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