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Über dieses Buch

This book analyses the comparative risks involved in the alternative investment market, the market of growing companies, and the 'main market', the market for more established companies.

Inhaltsverzeichnis

Frontmatter

1. Introduction

We conduct an extensive empirical study comparing the relative riskiness of two UK equity markets run by the London Stock Exchange: AIM the market for growth companies versus the Main Market, the market for more established companies. AIM has been a considerable success. Even by its survival over 19 years it has succeeded in relation to similar markets in other countries. During that period it has seen rapid growth and has emerged as the market of choice for smaller, newer companies in the UK and increasingly elsewhere. Investors often perceive AIM as riskier than the Main Market for comparable stocks. At a superficial level we find that AIM stocks may seem more risky than comparable Main Market stocks, but as the analysis is refined to ensure that the comparisons focus purely on the effect of being on different markets the difference shrinks and finally disappears. This conclusion concurs with the market practitioner’s view that there is no significant risk differential.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

2. Activities

The research comprises three elements – an interview program, a literature review and an extensive empirical analysis using 11 years of trade data.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

3. Interviews

The interview program suggested four conclusions. First, while AIM has less demanding minimum requirements than the Main Market (for example in terms of free float) the Nominated Advisors (Nomads) almost always insist that new AIM companies exceed minimum standards, and in practice, standards are similar to those of the Main Market. Second, although AIM, in its earlier days may have been more risky, its growth in recent years and the diversity of companies attracted to the market mean that risk is now much lower, and AIM companies are not significantly different in risk terms from comparable companies on the Main Market. Third, age (since admission) of a company is an important factor in determining risk, but after a relatively short time, perhaps two to three years, its importance disappears. Finally, in AIM (and the Main Market) there is a segmentation between larger, investable companies and a non-investable group – typically very small companies. The non-investable portion is high-risk by nature because it is difficult to trade.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

4. Literature Review

The literature review showed a lack of research on risk for small cap markets. In total roughly one hundred published pieces were identified, many of which related to the now defunct Neuer Markt and/or to IPO pricing. There are two main relevant results from the review. Stocks switching between markets have not been associated with changes in risk. Also, there are a number of risk-related characteristics of companies – in particular, size, age and industry – that tend to be related to the market on which these companies are listed.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

5. Empirical Analysis

We studied over 11 years of trades for AIM and Main Market stocks. The empirical analysis was conducted separately for two sample periods: from 2000 to 2004 and from 2005 to 2010. The first sample covers a phase of rapid growth and expansion for the AIM market whereas the second sample covers a phase of consolidation. A series of filters and adjustments were applied to the data. Every step of the data preparation process is justified and potential data selection biases are discussed.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

6. Preliminary Data Analysis

When comparing the volatility of stocks trading on different markets, it is important to compare stocks that have similar features in terms of market capitalization or size, industry grouping, age and liquidity. AIM stocks have substantially smaller market capitalization than Main Market stocks. Very few Main Market stocks have market capitalization lower than £5m and very few AIM stocks have market capitalization larger than £200m.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

7. Volatility Estimation

A series of alternative measures of volatility are considered. The first three measures are based on daily representative prices and four additional measures exploit intraday price changes.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

8. Basic Analysis of Relative Volatility

First, we conducted an analysis of comparable stocks that did not switch markets. A simple ratio analysis comparing the annual volatility of AIM and Main Market stocks showed AIM to be substantially more volatile than the Main Market. The volatility of AIM stocks ranged from 1.3 to 2.7 times that of comparable Main Market stocks, and was particularly high in 2005 and 2006.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

9. Relative Risk Allowing for Size, Age or Liquidity

We then considered size, age and industry effects on volatility. The results suggested that larger stocks are generally less volatile than smaller stocks, and also that small AIM stocks are significantly more volatile than comparable Main Market stocks.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

10. Regression Analyses with Multiple Variables

In the multivariate regression analysis we used the main risk-related variables (size, industry, age and market) to explain differences in volatility. Our results suggested that AIM stocks are significantly more volatile, although the difference is far smaller than that given by the simple ratio analysis. However the strong correlation between age and market on which the stock is listed makes it difficult for a regression to distinguish the impact of the two variables.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

11. Market-Switching Stocks

A significant number of stocks (273) have moved between the two markets. These stocks allowed us to study a single event, a market switch, abstracting from other company-specific factors. Again a succession of progressively more complex analyses were applied. After controlling for overall market volatility, the simple switchers analysis using ratios of pre and post-switch volatility to assess the impact of the switch had the following results: (1) When considering stocks switching from AIM to the Main Market, 71? of the switchers have greater volatility on AIM; (2) When considering stocks switching from the Main Market to AIM, 42? of these have greater volatility on AIM; (3) Overall, switching stocks showed marginally higher volatility on AIM. These results are consistent with the notion that AIM is viewed as slightly more risky.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

12. GARCH Analysis of Switchers

A more complex analysis of the switchers was conducted by using high-frequency data to construct GARCH models for the dynamics of volatility. In this analysis 19% of the switchers showed a significant change in volatility with a majority of these showing lower volatility in the AIM period.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

13. Conclusions

The main conclusion that comes out of this analysis is that the perception that AIM has higher volatility than the Main Market is perfectly understandable, but incorrect. Our simpler analyses generally find a large difference between the volatility of AIM and Main Market stocks. However as we move to more complex analyses differences in volatility between AIM and the Main Market are very small, usually not significant statistically and tend, if anything, to indicate a slightly lower volatility when on AIM.
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe, Stephen Wells

Backmatter

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