Some Effects of Errors on the Independence and Distribution of Stock Price Returns

There are many stages at which errors in recorded stock prices can appear. Some simple keypunching errors, for example, can cause substantial errors. This note demonstrates some effects of these errors on serial correlations and on the distributions of returns. One explanation is provided for observed negative first-order serial correlation and for observed “fat tails†in return distributions. Some of the effects are well-known but have not previously been documented.