Abstract
In this article we focus on beta estimation in the thinly-traded environment of the Johannesburg Stock Exchange (JSE). We build on existing literature by evaluating a beta estimation procedure known as the trade-to-trade which has not until now been considered in the context of the JSE. We contrast our results with two known estimation procedures, i.e. the Cohen et al. and the traditional ordinary least squares (OLS). The trade-to-trade methodology, the estimator proposed by Cohen et al. and OLS are objectively assessed for shares typical of the JSE on the basis of unbiasedness and efficiency in the controlled environment of a simulation study. The trade-to-trade technique is found to be superior on both counts and is recommended as the appropriate technique for beta estimation on the JSE.
Highlights
It is well known that infrequent/thin trading biases the estimates of financial risk statistics when traditional methods of estimation are used
In a further paper by Bradfield & Barr (1989) the appropriateness of the beta estimation procedure developed by Cohen et al (1983), which is aimed at correcting the bias caused by thin trading, was assessed for Johannesburg Stock Exchange (JSE) stocks
In this article we extend the results of Bradfield & Barr (1989) by assessing the efficiency of a further beta correction procedure known as the 'trade-to-trade' approach which was advocated by Dimson & Marsh (1983)
Summary
It is well known that infrequent/thin trading biases the estimates of financial risk statistics ( the beta of a share) when traditional methods of estimation are used. Several researchers have developed correction techniques to compensate for the biases in the estimates of beta caused by thin trading. The more notable contributions in the area of beta estimation are Dimson (1979), Scholes & Williams (1977) and Cohen et al (1983). On the Johannesburg Stock Exchange (JSE) Bradfield (1990) provides evidence of the extent of the bias in beta estimates caused by thin trading. In a further paper by Bradfield & Barr (1989) the appropriateness of the beta estimation procedure developed by Cohen et al (1983), which is aimed at correcting the bias caused by thin trading, was assessed for JSE stocks. In a further paper by Bradfield & Barr (1989) the appropriateness of the beta estimation procedure developed by Cohen et al (1983), which is aimed at correcting the bias caused by thin trading, was assessed for JSE stocks. Bradfield & Barr (1989) demonstrated that the correction procedure yields, on average, less biased estimates of beta in comparison with the traditional ordinary least squares (OLS) procedure
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