| In the empirical study or trading strategies designing, people tend to use the closing price of one trading day to represent the whole day's stock price, and this approach has become the practice of academia and the securities industry, but the rationality of this practice remains to be discussed. This dissertation collects the trading data in Shanghai and Shenzhen stock exchange from May 8, 2007 to November 29, 2010, and investigates the strength of closing price and volume-weighted average price each as daily stock price proxy. Based on research findings and analysis, we conclude that VWAP is a better choice than closing price as the daily stock price.Comparing with frequency distribution of closing daily returns, VWAP daily returns is more smooth without abnormal clusters and gaps at integer points as that of closing returns. The fact support that closing is easier to bring the distortion as the daily stock price proxy. Secondly, the higher trading volume at a historic price, the more reasonable for the price as benchmark in the future, in this sense VWAP should be more reasonable to be the daily stock price, because VWAP is defined to be the average transaction price for each shares over the trading horizon and a large proportion of trading the occurred just at or near the VWAP. This perspective of view is supported by the results of significance level of daily momentum estimators under regressions. Last but not least, through the results of the 25 portfolios constructed according to the market cap and book-to-market ratio, we find the absolute value of VWAP measured excessive daily return are more close to 0. We believe it is because VWAP spread the trading over a period in which investors can trade more shares than just at a spot, implying VWAP include a part of the market impact in itself, which make it more suited for designing trading strategies. |
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