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A NEW APPROACH TO CONTROLLING FOR THIN TRADING
Author(s) -
McInish Thomas H.,
Wood Robert A.
Publication year - 1985
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1985.tb00427.x
Subject(s) - econometrics , constant (computer programming) , control (management) , variable (mathematics) , beta (programming language) , computer science , trading strategy , economics , mathematics , artificial intelligence , mathematical analysis , programming language
Recent research has shown that thin trading can seriously bias beta estimates. Present techniques for controlling this bias in research designs involve the adjustment of OLS betas. This paper presents a new methodology that controls for this bias by forming portfolios where the level of thin trading is held constant, while the difference of another variable, pertinent to a specific research design, is maximized across the portfolios. Directly controlling the level of thin trading avoids reliance on beta adjustment techniques. Further, the linear programming model permits the control of the mean and higher moments of additional variables across portfolios.