The Stability of UK Risk Measures and The Problem of Thin Trading

Abstract

This paper examines the problems of estimating risk measures and their stability in thin markets. It shows analytically that conventional approaches used in previous studies can lead to serious overestimates of the stability of risk measures when shares are subject to thin trading. It then demonstrates, using UK data, that this is, in fact, a serious practical problem, and that the resultant biases are of precisely the form predicted. Finally, the paper presents reliable evidence on the stability of UK risk measures by using an estimation method designed to avoid thin trading bias. Using this approach, risk measures are found to be as stable in the UK as they are in the USA.

Thin Trading and the Estimation of Betas: The Efficacy of Alternative Techniques

“…This is not a new finding. Dimson and Marsh (1983) report strong correlations between trade‐to‐trade betas and trading frequency. They speculate that this correlation could have at least two explanations.…”

Shareholder Wealth Effects of European Domestic and Cross‐border Takeover Bids

“…Sixth, we calculate Dimson-betas to control for inaccurate beta-estimation resulting from thin trading which biases beta downwards (Dimson, 1979;Dimson and Marsh, 1983). These betas are the sum of 5 parameter estimates of the market model in which the current level of the daily market return, as well as its first three lags and one lead are included.…”

The Stability of the Relation Between the Stock Market and Macroeconomic Forces

“…For the USA, Francis (1979) found that the proportion of shares falling in the same (same or adjacent) risk quintile is 40 per cent (79 per cent) in the period 1961-71. For the UK, the corresponding figures are 33 per cent (72 per cent); see Dimson and Marsh (1983). Moreover, in market model studies, the correlations among â estimates for subsequent periods are always found to be positive, approaching unity as the number of securities in the portfolio increases.…”