Skip to main content
SpringerLink
Log in

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

  • Published:
Annals of Operations Research Aims and scope Submit manuscript

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 behavior 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 produce useful information about the risk characteristics of thinly traded stocks.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  1. T. Berglund and E. Liljeblom, Market serial correlation on a small security market. A note, J. Fin. 43 (1988) 1265–1274.

    Google Scholar 

  2. T. Berglund, E. Liljeblom and A. Löflund, Estimating betas on daily data for a small stock market, J. Banking Fin. 13 (1989) 41–64.

    Google Scholar 

  3. T. Berglund, B. Wahlroos and L. Grandell, The KOP and the UNITAS indexes for the Helsinki Stock Exchange in the light of a new value weighted index, Finnish J. Bus. Econ. 32 (1983) 30–41 (in Swedish).

    Google Scholar 

  4. D.J. Bradfield and G.D.I. Barr, Risk estimation in the thinly traded JSE environment, South African J. Bus. Manag. 20 (1989) 169–173.

    Google Scholar 

  5. P.A. Cartwright and C.F. Lee, Time aggregation and the estimation of the market model: empirical evidence, J. Bus. Econ. Statist. 5 (1989) 131–143.

    Google Scholar 

  6. K. Cohen, G.A. Hawawini, S. Mayer, R. Schwartz and D. Whitcomb, Friction in the trading process and the estimation of systematic risk, J. Fin. Econ. 12 (1983) 263–278.

    Google Scholar 

  7. K. Cohen, G.A. Hawawini, S. Mayer, R. Schwartz and D. Whitcomb, Estimating and adjusting for the intervaling effect bias in beta, Manag. Sci. 29 (1983) 135–148.

    Google Scholar 

  8. J.E.H. Davidson, D.F. Hendry, F. Srba and S. Yeo, Econometric modelling of the aggregate time-series relationship between consumers' expenditure and income in the United Kingdom, Econ. J. 88 (1978) 661–692.

    Google Scholar 

  9. E. Dimson and P. Marsh, The stability of UK risk measures and the problem of thin trading, J. Fin. 38 (1983) 753–83.

    Google Scholar 

  10. C. Granger and O. Morgenstern,Predictability of Stock Market Prices (Health Lexington Books, Lexington, MA, 1970).

    Google Scholar 

  11. D.F. Hendry and N.R. Ericsson, An econometric analysis of UK money demand inMonetary Trends in the United States and the United Kingdom by Milton Friedman and Anna J. Schwartz, Amer. Econ. Rev. 81 (1991) 8–38.

    Google Scholar 

  12. M.J. Malkamäki, T. Martikainen and J. Perttunen, On the riskiness of the world's stock markets, Euro. J. Oper. Res. 53 (1991) 288–296.

    Google Scholar 

  13. T. Martikainen and J. Perttunen, Return intervals, systematic risk estimates and firm size. Evidence from a thin security market, Econ. Lett. 36 (1991) 311–315.

    Google Scholar 

  14. J.B. McDonald and C.F. Lee, An analysis of nonlinearities, heteroscedasticity and functional form in the market model, J. Bus. Econ. Statist. 6 (1988) 4505–4509.

    Google Scholar 

  15. T.H. McInish and R.A. Wood, Adjusting for beta bias: an assessment of alternate techniques: a note, J. Fin. 41 (1986) 277–286.

    Google Scholar 

  16. S. Nickell, Error correction, partial adjustment and all that: an expository note, Oxford Bull. Econ. Statist. 47 (1985) 119–129

    Google Scholar 

  17. R. Roll, A critique of asset pricing theory's tests. Part I: On the past and potential testability of the theory, J. Fin. Econ. 5 (1977) 129–176.

    Google Scholar 

  18. R.A. Schwartz and D.K. Whitcomb, The time-variance relationship: evidence on autocorrelation in common stock returns, J. Fin. 32 (1977) 41–55.

    Google Scholar 

  19. R.A. Schwartz and D.K. Whitcomb, Evidence on the presence and causes of serial correlation in market model residuals, J. Fin. Quant. Anal. 12 (1977) 291–313.

    Google Scholar 

  20. W.F. Sharpe, Capital asset prices: A theory of market equilibrium under conditions of risk, J. Fin. 19 (1964) 425–442.

    Google Scholar 

  21. P. Yli-Olli, I. Virtanen and T. Martikainen, On the common factors in the Arbitrage Pricing Model in two Scandinavian countries, OMEGA 18 (1990) 615–624

    Google Scholar 

  22. R. Östermark, Arbitrage pricing models for two Scandinavian stock exchanges, OMEGA 17 (1989) 437–447.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of Vaasa, P.O. Box 297, SF-65101, Vaasa, Finland

    Martti Luoma, Teppo Martikainen & Jukka Perttunen

Authors
  1. Martti Luoma
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Teppo Martikainen
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Jukka Perttunen
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Luoma, M., Martikainen, T. & Perttunen, J. Thin trading and estimation of systematic risk: An application of an error-correction model. Ann Oper Res 45, 297–305 (1993). https://doi.org/10.1007/BF02282054

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF02282054

Keywords

Search

Navigation