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Reply: Specialists' Performance and Serial Dependence of Stock Price Changes

Published online by Cambridge University Press:  19 October 2009

Amir Barnea
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Extract

In my paper utilized time-variance relationships to detect the impact of NYSE specialists on stock price changes. Schwartz and Whitcomb (SW) seem to agree that return variability and not average bid ask spreads is the appropriate measure on which performance of NYSE specialists should be evaluated. They raise, however, several objections regarding the use of time-variance relationships to evaluate specialists' performance. In particular they show that the proposed performance measure which is the average (per specialist unit) ratio of short term relative to long term return variance depends on the degree of autocorrelation in the return series. For first order serial correlation of returns they obtain,

where r is the performance measure (in terms of a single security),

T is the length of the differencing interval,

are returns variances for one day and T day intervals respectively,

ρ1,2 is first order serial correlation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 5 , December 1976 , pp. 909 - 911
Copyright
Copyright © School of Business Administration, University of Washington 1976

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References

1 Barnea, A., “Performance Evaluation of New York Stock Exchange Specialists.” Journal of Financial and Quantitative Analysis (September 1974), pp. 511–535.CrossRefGoogle Scholar

2 Schwartz, R. and Whitcomb, D., “Assessing the Impact of Stock Exchange Specialists on Stock Volatility.” Journal of Financial and Quantitative Analysis (September 1976).CrossRefGoogle Scholar

3 See, for example, the early study of Working, H., “Price Effects of Scalping and Day Trading,”Proceedings of the Seventh Annual Symposium: Commodity Markets and the Public Interest(Chicago1954)Google Scholar. Extended analysis of market operations which induce negative price dependencies appears in Smidt, S., “A New Look at the Random Walk Hypothesis,” Journal of Financial and Quantitative Analysis (September 1968).CrossRefGoogle Scholar

4 Garman, M., “Market Microstructure,” Journal of Financial Economics (June 1976), pp. 257–276.CrossRefGoogle Scholar

5 Niederhoffer, V., and Osborne, M., “Market Making and Reversal on the Stock Exchange,” Journal of the American Statistical Association (December 1966).CrossRefGoogle Scholar

6 Institutional Investor Study Report of the SBC, Volume 4 (Washington: U.S. Government Printing Office, 1971), Chapter X, p. 1454.Google Scholar

7 Ibid., p. 1929 and Table XII-26.

8 Those measures were developed in the Institutional Investor Study.

9 See Barnea, A., “Performance Evaluation of NYSE Specialists,” Unpublished Ph.D. Dissertation, Cornell University (1972).Google Scholar

10 See Institutional Investor Study, p. 1925.