Thin trading and estimation of systematic risk: An application of an error-correction model

Thin trading and estimation of systematic risk: An application of an error-correction model

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Article ID: iaor1994953
Country: Switzerland
Volume: 45
Issue: 1/4
Start Page Number: 297
End Page Number: 305
Publication Date: Dec 1993
Journal: Annals of Operations Research
Authors: , ,
Keywords: financial
Abstract:

Financial economics literature indicates that estimates for securities’ systematic risk, i.e. the beta coefficients, are highly affected by infrequent trading. This is an especially serious problem in small security markets. In this study, the applicability of an error-correction model is investigated for modeling the risk behaviour of thinly traded securities. The empirical results from a small stock market, i.e. the Helsinki Stock Exchange, indicate the estimated error-correction term to be highly dependent on the underlying trading frequency of the stock, while the direct effect is dependent merely on the market value of the firm. The model thus appears to product useful information about the risk characteristics of thinly traded stocks.

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