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

Listed author(s):
  • Piet Sercu
  • Martina Vandebroek
  • Tom Vinaimont
Registered author(s):

    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.

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    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 35 (2008-11)
    Issue (Month): 9-10 ()
    Pages: 1196-1219

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    Handle: RePEc:bla:jbfnac:v:35:y:2008-11:i:9-10:p:1196-1219
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