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Measuring the Systematic Risk of IPO’s Using Empirical Bayes Estimates in the Thinly Traded Istanbul Stock Exchange

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  • Muradoglu, Gulnur
  • Zaman, Asad
  • Orhan, Mehmet

Abstract

The systematic risk of IPO’s in the thinly traded Istanbul Stock Exchange (ISE) are estimated using Empirical Bayes Estimators (EBE). The sectors that the firms belong to, provide the priors. Comparisons are made with OLS estimators across different estimation and forecasting periods. Two benchmark criteria are used; sum of squared residuals and sum of absolute residuals. The application requires some complicated manipulation of the theory where some inferiors of the ordinary Bayesian approach are avoided. Results show that using the EBE procedure, betas can be calculated with greater precision than OLS. This enables us to evaluate IPO’s on similar intuition with other stocks, i.e. in a portfolio context rather than in isolation.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13879.

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Date of creation: 2003
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Publication status: Published in International Journal of Business 8.3(2003): pp. 315-334
Handle: RePEc:pra:mprapa:13879

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Keywords: Empirical Bayes method; Beta estimation; Forecasting; Capital Asset Pricing Model; Initial public offering;

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  1. Andrew F. Siegel, 1995. "Measuring Systematic Risk Using Implicit Beta," Management Science, INFORMS, INFORMS, vol. 41(1), pages 124-128, January.
  2. Stambaugh, Robert F., 1982. "On the exclusion of assets from tests of the two-parameter model : A sensitivity analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 10(3), pages 237-268, November.
  3. G. Andrew Karolyi, 1992. "Predicting Risk: Some New Generalizations," Management Science, INFORMS, INFORMS, vol. 38(1), pages 57-74, January.
  4. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  5. Stambaugh, Robert F., 1997. "Analyzing investments whose histories differ in length," Journal of Financial Economics, Elsevier, Elsevier, vol. 45(3), pages 285-331, September.
  6. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, Elsevier, vol. 43(2), pages 153-193, February.
  7. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, American Finance Association, vol. 46(5), pages 1575-617, December.
  8. Wittkemper, Hans-Georg & Steiner, Manfred, 1996. "Using neural networks to forecast the systematic risk of stocks," European Journal of Operational Research, Elsevier, Elsevier, vol. 90(3), pages 577-588, May.
  9. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(2), pages 197-226, June.
  10. Tinic, Seha M & West, Richard R, 1974. "Marketability of Common Stocks in Canada and the U.S.A.: A Comparison of Agent versus Dealer Dominated Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 29(3), pages 729-46, June.
  11. Lubos Pástor & Robert F. Stambaugh, . "Costs of Equity Capital and Model Mispricing," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 04-98, Wharton School Rodney L. White Center for Financial Research.
  12. Bera, Anil K & Kannan, Srinivasan, 1986. "An Adjustment Procedure for Predicting Systematic Risk," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 1(4), pages 317-32, October.
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