Dealing with the Problem of Missing Data: A Short Note

Prof. Mazin A. M. Al Janabi, PhD, SNI II

Full Professor of Finance & Banking and Financial Engineering
EGADE Business School, Tecnologico de Monterrey,
Santa Fe Campus, Mexico City, Mexico.

It is familiar to observe the problem of missing data and particularly in emerging-markets where
often one can become aware of the fact that not all data are available. To cope with this problem,
one can adopt the following suggested guidelines:

 If there are no prices available at all (for instance because the market was closed) then it
is recommended to not include that date(s) in the database.

 If prices are available for some instruments, but not for others, one can calculate a price
from the geometric average (mean) of the previous and the following price:

1. One price is missing:

Pt  2 Pt 1 * Pt 1

2. Two prices are missing:

Pt  3 Pt 1 * Pt 2
2

Pt 1  3 Pt 1 * Pt 2
2

In dealing with the missing data problem one should keep in mind the following:

 The fact that data are missing should not be neglected—quite often it is an indication
of illiquidity.

 Using an average price results in an underestimate of volatility.

1|P age