Abstract
Estimates on betas may be distorted by thin (infrequent) trading effects,
yielding incorrect estimates. Finance literature has proposed numerous
techniques to eradicate the effects of thin trading, ranging from (il-)liquidity
indicators indicating distortions in beta estimates to beta correction proce-
dures directly correcting them in the traditional market model. This article
provides an overview of comprehensive sets of 16 popular (il-)liquidity indi-
cators and 10 popular beta correction procedures. Subsequently, these (il-)
liquidity indicators and beta correction procedures are examined according
to superiority in terms of accuracy (predictive ability) among themselves
as well as against each other. The results indicate (i) the (il-)liquidity indi-
cators to generally outperform the beta correction procedures in small as
well as in large stock markets, across different levels of thin trading as well
as across different levels of risk (beta magnitudes) and, (ii) the Illiquidity
(Amihud-Hasbrouck) Indicator, the Return-to-Turnover Indicator as well as
the Trade-to-Trade Method to dominate.
yielding incorrect estimates. Finance literature has proposed numerous
techniques to eradicate the effects of thin trading, ranging from (il-)liquidity
indicators indicating distortions in beta estimates to beta correction proce-
dures directly correcting them in the traditional market model. This article
provides an overview of comprehensive sets of 16 popular (il-)liquidity indi-
cators and 10 popular beta correction procedures. Subsequently, these (il-)
liquidity indicators and beta correction procedures are examined according
to superiority in terms of accuracy (predictive ability) among themselves
as well as against each other. The results indicate (i) the (il-)liquidity indi-
cators to generally outperform the beta correction procedures in small as
well as in large stock markets, across different levels of thin trading as well
as across different levels of risk (beta magnitudes) and, (ii) the Illiquidity
(Amihud-Hasbrouck) Indicator, the Return-to-Turnover Indicator as well as
the Trade-to-Trade Method to dominate.
| Original language | English |
|---|---|
| Pages (from-to) | 18-35 |
| Number of pages | 19 |
| Journal | The European Business Valuation Magazine |
| Volume | 2 |
| Issue number | 2 |
| Publication status | Published - Jun 2023 |
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