A note on the Wang and Wang measure of the quality of the compass rose

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This digital document is a journal article from Journal of Banking and Finance, published by Elsevier in 2006. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.
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H. Wang and C. Wang [Visibility of the compass rose in financial asset returns: A quantitative study, J. Bank. Financ. 26 (2002), 1099-1111] derive a measure of the visibility of the radial patterns that appear in a plot of current and past returns, which are more commonly known as the compass rose. In theory, this measure should be positively related to the tick/volatility ratio. In practice however, we find that this relationship does not hold for higher tick/volatility ratios that are common to stock market data. Thus, the use of this measure is limited in real world applications. We propose a correction factor that improves the behaviour of the quality measure over higher tick/volatility ratios, however, further research is required to fully identify and correct the problem.