Reply: Specialists' Performance and Serial Dependence of Stock Price Changes

In my paper utilized time-variance relationships to detect the impact of NYSE specialists on stock price changes. Schwartz and Whitcomb (SW) seem to agree that return variability and not average bid ask spreads is the appropriate measure on which performance of NYSE specialists should be evaluated. They raise, however, several objections regarding the use of time-variance relationships to evaluate specialists' performance. In particular they show that the proposed performance measure which is the average (per specialist unit) ratio of short term relative to long term return variance depends on the degree of autocorrelation in the return series. For first order serial correlation of returns they obtain,where r is the performance measure (in terms of a single security),T is the length of the differencing interval, are returns variances for one day and T day intervals respectively,Ï 1,2 is first order serial correlation.