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

25 Pages Posted: 1 Mar 2007  

Piet Sercu

FEB at KU Leuven

Martina L. Vandebroek

Katholieke Universiteit Leuven - Faculty of Business and Economics

Tom Vinaimont

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: September 2006

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.

Keywords: Market Model, Thin Trading

JEL Classification: C13, C22, G11

Suggested Citation

Sercu, Piet and Vandebroek, Martina L. and Vinaimont, Tom, Thin-Trading Effects in Beta: Bias v. Estimation Error (September 2006). Available at SSRN: https://ssrn.com/abstract=966063 or http://dx.doi.org/10.2139/ssrn.966063

Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
Belgium
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

Martina L. Vandebroek

Katholieke Universiteit Leuven - Faculty of Business and Economics ( email )

Naamsestraat 69
B-3000 Leuven
Belgium

Tom Vinaimont (Contact Author)

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences ( email )

Hong Kong

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