Thin-trading effects in beta : Bias v. estimation error

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

8 Scopus Citations
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Author(s)

  • Piet Sercu
  • Martina Vandebroek
  • Tom Vinaimont

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)1196-1219
Journal / PublicationJournal of Business Finance and Accounting
Volume35
Issue number9-10
Publication statusPublished - Nov 2008

Abstract

Two regression coefficients often used in Finance, the Scholes-Williams (1977) quasi-multiperiod 'thin-trading' beta and the Hansen-Hodrick (1980) overlapping-periods regression coefficient, can both be written as instrumental-variables estimators. Competitors are Dimson's beta and the Hansen-Hodrick original OLS beta. We check the performance of all these estimators and the validity of the t-tests in small and medium samples, in and outside their stated assumptions, and we report their performances in a hedge-fund style portfolio-management application. In all experiments as well as in the real-data estimates, less bias comes at the cost of a higher standard error. Our hedge-portfolio experiment shows that the safest procedure even is to simply match by size and industry; any estimation just adds noise. There is a clear relation between portfolio variance and the variance of the beta estimator used in market-neutralizing the portfolio, dwarfing the beneficial effect of bias. © 2008 Blackwell Publishing Ltd.

Research Area(s)

  • Market model, Thin trading

Citation Format(s)

Thin-trading effects in beta : Bias v. estimation error. / Sercu, Piet; Vandebroek, Martina; Vinaimont, Tom.

In: Journal of Business Finance and Accounting, Vol. 35, No. 9-10, 11.2008, p. 1196-1219.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review