A note on the Wang and Wang measure of the quality of the compass rose |
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Authors: | Heather Mitchell Michael D McKenzie |
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Institution: | aSchool of Economics, Finance and Marketing, Royal Melbourne Institute of Technology, GPO Box 2476V, Melbourne 3001, Australia |
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Abstract: | H. Wang and C. Wang Visibility of the compass rose in financial asset returns: A quantitative study, J. Bank. Financ. 26 (2002), 1099–1111] derive a measure of the visibility of the radial patterns that appear in a plot of current and past returns, which are more commonly known as the compass rose. In theory, this measure should be positively related to the tick/volatility ratio. In practice however, we find that this relationship does not hold for higher tick/volatility ratios that are common to stock market data. Thus, the use of this measure is limited in real world applications. We propose a correction factor that improves the behaviour of the quality measure over higher tick/volatility ratios, however, further research is required to fully identify and correct the problem. |
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Keywords: | Compass rose Chaos Tick/volatility ratio |
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