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Measuring price discovery: The variance ratio, the R2, and the weighted price contribution

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  • Jos, van Bommel

Abstract

We analyze the statistical properties of three price discovery measures: The variance ratio, the weighted price contribution (WPC), and the R2 of unbiasedness regressions. We find that, if the price process is a driftless martingale, only the WPC is an unbiased estimator for the return variance explained during a time interval. For autocorrelated processes with a drift, only the R2 of the unbiasedness regression is consistent, but it is biased for small samples.

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  • Jos, van Bommel, 2011. "Measuring price discovery: The variance ratio, the R2, and the weighted price contribution," Finance Research Letters, Elsevier, vol. 8(3), pages 112-119, September.
    • Handle: RePEc:eee:finlet:v:8:y:2011:i:3:p:112-119
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    Cited by:

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    3. Wang, Jianxin & Yang, Minxian, 2015. "How well does the weighted price contribution measure price discovery?," Journal of Economic Dynamics and Control, Elsevier, vol. 55(C), pages 113-129.
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    6. Ibikunle, Gbenga, 2015. "Opening and closing price efficiency: Do financial markets need the call auction?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 208-227.

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