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Thin-Trading Effects in Beta: Bias "v." Estimation Error

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  • Piet Sercu
  • Martina Vandebroek
  • Tom Vinaimont

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. Copyright (c) 2008 The Authors Journal compilation (c) 2008 Blackwell Publishing Ltd.

Suggested Citation

  • Piet Sercu & Martina Vandebroek & Tom Vinaimont, 2008. "Thin-Trading Effects in Beta: Bias "v." Estimation Error," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(9-10), pages 1196-1219.
  • Handle: RePEc:bla:jbfnac:v:35:y:2008-11:i:9-10:p:1196-1219
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    References listed on IDEAS

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    Cited by:

    1. Dębski Wiesław & Feder-Sempach Ewa & Świderski Bartosz, 2014. "Intervalling Effect On Estimating The Beta Parameter For The Largest Companies On The WSE," Folia Oeconomica Stetinensia, De Gruyter Open, vol. 14(2), pages 270-286, December.
    2. Fotis, Panagiotis & Pekka, Victoria & Polemis, Michael, 2015. "Intervalling-effect bias and evidences for competition policy," MPRA Paper 63211, University Library of Munich, Germany.
    3. Alejandro Bernales & Diether W. Beuermann & Gonzalo Cortazar, 2014. "Thinly traded securities and risk management," Estudios de Economia, University of Chile, Department of Economics, vol. 41(1 Year 20), pages 5-48, June.
    4. Liu, Fang & Sercu, Piet & Vandebroek, Martina, 2015. "Orthogonalized regressors and spurious precision, with an application to currency exposures," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 245-263.

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