Converting true returns into reported returns: A general theory of linear smoothing and anti-smoothing

Michael McKenzie, Stephen Satchell and Warapong Wongwachara

Journal of Empirical Finance, 2014, vol. 28, issue C, 215-229

Abstract: In this paper, we present a unified theory of linear smoothing, which looks at the problem from a time-series perspective. We use the term ‘conversion’ to refer to generic operations that create a difference between true returns and reported returns. ‘Smoothing’ occurs when that conversion process leads to a reduction in the variance of the reported returns and we establish the conditions which guarantee smoothing. Most importantly, we discuss situations where ‘anti-smoothing’ can occur, i.e. reported returns become more volatile than their true counterparts. Finally, we present empirical evidence of the presence of both smoothing and anti-smoothing in returns data for a number of different classes of asset.

Keywords: Smoothing; Anti-smoothing; Appraisal; Time series; Alternative asset returns (search for similar items in EconPapers)
JEL-codes: C22 G12 G24 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:28:y:2014:i:c:p:215-229

DOI: 10.1016/j.jempfin.2014.07.003

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