[R-SIG-Finance] calculating the high frequency return

Rob Steele gmain.20.phftt at xoxy.net
Thu Jan 8 18:23:09 CET 2009

Doing what you propose makes sense but be aware that it assumes there's
enough depth at the quote to fill your order and that your order has no
lasting impact on the market.  Both assumptions are valid if your order
is small enough and the stock is liquid enough but you'd have to get
much fancier to model large orders realistically.

markleeds at verizon.net wrote:
>  Suppose I have the bid and ask data for a stock XXX, at every minute (
> best bid and best ask ). Then, say I want to calculate the
> return to
> A) going long that stock at 10:10 for 10 minutes.
> B) going short that stock at 10:10 for 10 minutes.
> I realize that , since I have only quote data, the whole thing is
> approximate anyway because the actual prices that one transacts in
> are unknown ( or in the transaction price data which I'd rather avoid
> dealing with ) but my understanding is that  the best approximation is
> lgoing ong return =   (bid at 10:20 - ask at 10:10)/ask at 10:10
> going short return = ( ask at 10:20 - bid at 10:10)/bid at 10:10
> Since I'm taking the spread into account in the formula ( rather than
> using ( midpoint at 10:20 - midpoint at 10:10)/midpoint at 10:10 ),
>  then these are not the negative of each other, as they would be if one
> used the midpoint.  but I would think that above gives a better measure
> than using the midpoint because it implicity takes into account the
> transaction cost due to the spread which actually could be different
> depending on whether one is going long or short.
> Any comments or corrections are appreciated. There's also interest
> rebates when one shorts but I'm assuming they are small enough
> to ignore.  it also assumes that you can close the transaction EXACTLY
> when you want to which is not particularly realistic either. Still, if
> there's something wrong with above or a better way to calculate these
> things or a known standard source that explains it, enlightenment is
> appreciated.
> Mark

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