Choosing Close Prices for Thinly Traded Stocks
Summary
The document considers how a chart should represent a stock when no trades occur for several days. Two candidate prices are the last traded price carried forward and a current bid, ask, or valuation price. The responses caution that neither necessarily represents the stock’s changing underlying value.
A zero-volume period itself conveys information about liquidity and may relate to the size of changes in fundamental value. A friction model offers a way to distinguish latent value changes from observed price changes: trades reflect changes in value only when the expected gain to a marginal trader exceeds the costs of trading. For charting, the practical recommendation is usually to display trade prices, letting a flat segment or gap show the absence of trading. The discussion provides conceptual guidance rather than an empirical comparison of pricing choices, and it does not specify a universal method for estimating latent value. The appropriate representation depends on whether the chart is intended to show transactions or another quote-based measure.
Key ideas
- A period without trades contains information about a stock’s liquidity.
- Carrying forward the last trade or substituting a quote can both misrepresent current value.
- Friction models distinguish underlying value changes from observed returns when trading costs impede transactions.
- A trade-price chart can show inactivity as a flat segment or a gap.
Tags
Full text
# What close price to assume for thinly traded stocks? # What close price to assume for thinly traded stocks? If a thinly traded stock has not traded for the last few days (volume=0), is it better to use the last known trade price (i.e. roll over last non-missing trade price) or use last known bid/ask/valuation price? This is for stock chart application. ## Answer by Ryogi (score 7) https://quant.stackexchange.com/a/2362 I don't trust either. That a stock didn't trade carries information about its liquidity and about the magnitude of innovations in its fundamental value. If it is feasible within your model, try to incorporate the framework of Rosett (1959, “A Statistical Model of Friction in Economics”, Econometrica). For a recent application of the friction model to financial data, see “Corporate Yield Spreads and Bond Liquidity” (JF, by Chen, L., D. A. Lesmond, and J. Wei). The basic idea behind using a friction model of liquidity is the following: while true returns are determined by many stochastic factors, observed returns mirror changes in the true value only if the liquidity costs are less then the profit to the marginal trader. ## Answer by Darren Cook (score 4) https://quant.stackexchange.com/a/2386 By stock chart application you mean you are making a charting tool for traders? Typically there is a choice to plot trade, bid or ask, and almost all the time they will want to look at trade prices. If a stock hasn't been trading then the flatline (or gap) on the chart communicates that.
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.