Which one(s) of the following will produce a lower correlation estimate? Why?

1, Appraisal(smoothed) data 2, high-frequency data 3, stale-price bias

Thanks.

PS. More than one choice, I think.

Which one(s) of the following will produce a lower correlation estimate? Why?

1, Appraisal(smoothed) data 2, high-frequency data 3, stale-price bias

Thanks.

PS. More than one choice, I think.

I would say appraisal method.For assets that have no liquid/deep markets, it is difficult to estimate parameters such as return/volatility given infrequent market transactions, motivating an appraisal approach to valuation…this smoothing approach has a tendency to underestimate volatility aswell as the correlation of the asset’s returns with the returns of other asset classes.

I would think

a. Appraisal (smoothed) data -> data is being smoothed for lack of pricing data. So this would be a lower estimate than if the prices were available. Here volatility would be reduced due to the smoothing.

b. Stale Price Bias - older stale prices - would also have pretty much the same effect as above. Lack of prices = Lower volatility = lower correlation estimate.

All 3 will bias correlation downward. High frequency data is prone to asynchronysm across variables which causes artifical low variance, sd, and correlations.

Appraisal data and stale pricing is inter-related as the information between appraisals can be old (stale) causing correlations and volatility measures to appear lower than they actually are.

I would say stale price bias only.

Smoothed data and high frequesncy data I believe both INCREASE correlations artificially.

My answer was not a guess, i know it is correct with absolute certainty…

Can you cite the book/reading # for High frequency data? I remember reading this but cannot find it now.

Last years mock exam - afternoon. Number 26 deals with appraisal data and 27 with high frequency. I knew this because I did it (again) like the day before you posted this.

high-frequency data?

High frequency daily returns have lower correlation by a higher standard deviation.

It is strange but true that both higher frequency data NAD lower frequency date (appraised values, stale prices) produce lower correlations. I guess you need just the right amount of frequency.

so all three lower the correlation estimate. We can not determine however which produces the lowest amongst them.

markFAIL is correct. I will review this again in late may.

- stale price bias is on page 74. Measured standard deviation could be
**lower or higher**. (Another mystery to me, can you explain it in plain language?) Thanks.

prices are not changing. If the actual prices in the market had they been available were lower - your standard deviation shown by the stale prices is higher. But if the prices had they been available were higher - your standard deviation calculated with the stale prices is lower.