Roll (1984) assumes that the price, pt, of an asset follows where f is a constant...

   

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Roll (1984) assumes that the price, pt, of an asset follows where f is a constant fundamental price, s is the bid-ask spread and It is a binary indicator variable given by It S Pt = f + It = +1, with probability 1/2, (buyer) -1, with probability 1/2. (seller) (a). Derive E(It), Var(It), and Corr(It, It-1). (b). Denote Alt = It It-1. Derive E(AI), Var(AIt), and Corr(Alt, Alt1). (c). Denote Apt = Pt - Pt-1. Derive Var (Apt) and Corr(Apt, Apt-k) for k = 1,2. (d). Please make a comment on what you have found in solving question (c). Windows Go to Settings to activate Wir Roll (1984) assumes that the price, pt, of an asset follows where f is a constant fundamental price, s is the bid-ask spread and It is a binary indicator variable given by It S Pt = f + It = +1, with probability 1/2, (buyer) -1, with probability 1/2. (seller) (a). Derive E(It), Var(It), and Corr(It, It-1). (b). Denote Alt = It It-1. Derive E(AI), Var(AIt), and Corr(Alt, Alt1). (c). Denote Apt = Pt - Pt-1. Derive Var (Apt) and Corr(Apt, Apt-k) for k = 1,2. (d). Please make a comment on what you have found in solving question (c). Windows Go to Settings to activate Wir

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To solve the given questions lets go step by step a Deriving EIt VarIt and CorrIt It1 We are given t... View the full answer