Censoring, Firm Size and Trading Volume on Beta Risk Estimation of Malaysian Banking

Stocks

Assoc Prof Dr Norashfah Hanim Yaakop Yahaya Al-Haj

ABSTRACT

This paper examines the impact of censoring, firm size and trading volume on beta risk
estimations of Malaysian banking stocks. An alternative beta risk estimator is used to cope
with a situation of extreme thin trading, those with frequent zero observations in their return
series. The study illustrates the empirical behavior of Malaysian banking stocks from the
period 1998 to the year 2000 via the basic approach in the context of a sample selectivity
model. Particularly, the model separates two components which comprise a selectivity
equation that deals with the “spike” and a regression model that is applied to the non-
censored data. The preliminary judgement as such that Malaysian banking stocks may be
associated with thin trading, the results should give some downward bias and the use of a
standard estimator will understate expected returns. The results of the study here, seems mixed
giving some lower and some higher estimates. Even though that, the changes in the different
estimations are still minimal. It is plausible to see such a result as the banking sector is a large
business sector in the economy.

Keywords: Malaysian Banking Stocks, Beta Risk Estimation, Firm Size, Trading Volume,
Censoring and Thin Trading.

1. ITRODUCTIO

In addressing global economic challenges, Malaysia has participated actively in international path to
maintain the momentum for reform and offered outstanding consideration of the diverse background
of countries in the global system. As it is envisaged that the financial sector will not only play a more
efficient and significant role in supporting the continued transformation process in the economy, but
also become an important source of growth in the economy. The financial system comprises of three
different parts that are the banking system, the non-bank financial intermediaries and the financial
markets. So far, the structure of the financial system in Malaysia is well diversified and this is the
direct result of the authorities’ steady effort to liberalise and develop the financial market.

Nonetheless, the global economic and business environment as well as rapid technological advances
over the last decade has had a significant impact on the development of the financial system of
Malaysia. However, the country’s policies for expansion and diversification started later than in
Europe and the US thus, not surprisingly, the depth of the market is undersized relative to the western
region. In addition, the stocks in the market will also be mostly thinly traded1. Ibbotson, Kaplan and
Peterson (1997) and Annin (1997) state that thin trading is strongly associated with firm size,
meaning the most thinly traded stocks are the smallest stocks. Further, it is most likely that these
smallest stocks exhibit severe problems with their beta risk estimates. Due to this fact, in terms of
coping with the technique of beta estimation, the risk assessment procedures have to suit situations of
thin trading to avoid incorrectly estimated betas.
1
It is well known in the literature that thin trading and firm size are strongly related, example Roll (1981) and Reinganum (1982)
 It cannot be denied that systematic risk or the beta measurement is central to many applications of
finance2. The common technique to estimate beta is to apply the standard empirical testing of the
Capital Asset Pricing Model (CAPM). The model was originally proposed, by Sharpe (1964) and
Lintner (1965). The CAPM predicts that the expected return on an asset above the risk free rate is
proportional to non-diversifiable risk, which is measured by the covariance of the asset return with the
return in the market portfolio. In the CAPM, there should be a positive and linear relationship
between expected return and systematic (beta) risk. The main concern of this standard model is that it
assumes beta is constant. This in itself caused the main problem in the empirical implementation of
the CAPM and researchers face a multitude of choices in beta estimations3.

The issue of beta estimation gets more involved when dealing with thinly traded stocks. And most
likely, this will induce a bias in the estimated betas. Significant progresses has been made along the
lines of providing alternative beta estimators to overcome these thin trading problems, and were
illustrated in the work of Scholes and Williams (1977), Dimson (1979) and Fowler and Rorke (1983).
However, it is likely that none of these alternative estimators will perform well in cases of extreme
thin trading because in extreme circumstances, the stock will not be traded at all for a given period
hence, resulting in an observed zero change in price and consequently, zero return. As such, in these
cases, using the standard market model estimated under the ordinary least squares estimators would
not have the desirable statistical properties of consistency, unbiasedness and efficiency4. Thus, what is
desired is a configuration that separates the modeling of the zero return observations from the non-
zero return observations.

The study of Reinganum (1982) suggests an adjustment to beta estimates to correct for the thin
trading bias but does not produce betas that are large enough to explain the ‘small firm’ effect. This is
the motivation of the present study to provide better estimates of the betas of the Malaysian banking
stocks that are most likely to be smaller than their western counterparts. Hence, the fundamental
purpose here is to adapt the technique by Brooks et al. (2004) designed for coping with the situation
of extreme thin trading5. Further, in providing greater scope to the study, the superiority of the model
will also be compared to the most commonly used technique of thin trading; that is the Dimson
estimator with two leads and two lags of the market return. Specifically, this study will utilize the
technique that adjusts for the censoring induced in the data that is, the “spike” of zero returns that
occurs for stocks subject to extreme cases of thin trading. In addition to its simplicity, the model is
known to have desirable statistical properties as it is done in a two-stage process, explained in a
sample selectivity model. This model is exemplified by a selectivity equation that deals with the
“spike” and a regression model that is applied to the non-censored data. Hence, we describe the
resultant beta estimates as selectivity corrected betas.

The plan of the paper is as follows. Section 2 and 3 of the paper will go over respectively, the
background of the study which includes the literature review and research methodology of the study.
Section 4 summarizes the research findings and presents the data analyzed and the results. Section 5
contains some concluding remarks.

The next section confers the literatures on risk dynamism in the Malaysian banks with utilisation of
econometric modelling in regards to censoring, size and volume of Malaysian Banking Stock.

2
Systematic risk is the portion of risk that cannot be diversified away and is held by investors.
3
See the work of Brailsford, Faff and Oliver (1997)
4 The result will be statistically tested, later in the paper.
5 See also the work of Lange (1999) on modeling asset market volatility in a small market.
 2.0 LITERATURE REVIEW

2.1 Trading Volume and Firm Size

The global economic and business environment as well as rapid technological advances over
the last decade has had a significant impact on the development of the financial system of
Malaysia. However, the country’s policies for expansion and diversification started later than
in Europe and the US. Not surprisingly, the depth of the market is small. The stocks in the
market will also be mostly thinly traded6. In addition, the fact that the Malaysian market most
commonly associated with large shareholders and small float this could add to possibility of
thin trading. Ibbotson, Kaplan and Peterson (1997) and Annin (1997) stated that thin trading is
strongly associated with firm size, meaning the most thinly traded stocks are the smallest
stocks. Further, it is most likely that these smallest stocks exhibit severe problems with their
beta risk estimates. Due to this fact, in terms of coping with the technique of beta estimation,
the risk assessment procedures have to suit situations of thin trading to avoid incorrectly
estimated betas.

2.2 Censoring

“Censored data” for an asset is the presence of zero returns in the observed return data. This is
the case when there will be an occurrence of a “spike” in the distribution of returns at zero. The
degree of censoring in a dataset with n observations may be measured by the proportion of
observations piled up at the censoring point (in the case here at zero). This proportion is given
by c = n1/ n, where n1 is the number of observations at the censoring point, zero.

As noted in Maddala (1989) and Greene (2003, 1997), the parameters in a linear regression
model are biased and inconsistent in the presence of censoring in a variable. The extent of the
bias and inconsistency problems in the least squares estimators depends upon the degree of
censoring, which is c. The closer c is to unity, the more severe are the problems and when c
equals zero there is no censoring and least squares estimators are appropriate. It is the
censoring in the dependent variable that causes the problems with the estimation technique.

The purpose of this paper is to adapt the technique by Brooks, Faff, Fry, and Gunn, (2004)
designed for coping with the situation of extreme thin trading7. Further, in providing greater
scope to the study, the superiority of the model will also be compared to the most commonly
used technique of thin trading that is the Dimson estimator with two leads and two lags of the
market return.

Specifically, this study will utilize the technique that adjusts for the censoring induced in the
data that is, the “spike” of zero returns that occurs for stocks subject to extreme cases of thin
trading. In addition to its simplicity, the model is known to have desirable statistical properties
as it is done in a two-stage process, explained in a sample selectivity model. This model is
exemplified by a selectivity equation that deals with the “spike” and a regression model that is
applied to the non-censored data. Hence, we describe the resultant beta estimates as selectivity
corrected betas.

6
It is well known in the literature that thin trading and firm size are strongly related; for example Roll (1981) and Reinganum
(1982)
7
See also the work of Lange (1999) on modeling asset market volatility in a small market.
 Many models exist for censored data depending on the perceived reasons for the occurrence of
the zeros. Whilst, many of the applications of this censored data issue are on labour economics
studies this were as such displayed in the work of Tobin (1958), Quester and Greene (1982)
and Jarque (1987). The results, however, have been applied in many other fields, including in
empirical finance [Heckman (1979), Greene (1983), and Maddala (1989) etc.] and in other
researchers8. The models differ according to the type of censoring and the assumptions made
concerning the underlying data generating process.

From this development, the study of Blundell and Meghir (1987) proposed a range of two
equation models to use with censored data. However, in this thesis, only one such model is
being considered, i.e., the sample selectivity model which is applied to the modelling of returns
in the presence of zero returns. Thus, this model is suitable for particular relevance of thin
trading.

2.3 Impact of Censoring, Firm Size and Trading Volume

As detailed in the author previous work, the measurement of systematic risk is central to many
applications of finance. Moreover, the commonly used method to this measurement is to apply
the standard market model. However, the main concern of this standard model is that it
assumes that beta is constant. This in itself causes the main problem in the empirical
implementation of the CAPM and researchers face a multitude of choices in beta estimation9.

The issue of beta estimation gets more involved when dealing with thinly traded stocks. In
addition, most likely, this will induce a bias in the estimated betas. Significant progresses has
been made along the lines of providing alternative beta estimators to overcome these thin
trading problems, as illustrated in the work of Scholes and Williams (1977), Dimson (1979)
and Fowler and Rorke (1983).

However, it is likely that none of these alternative estimators will perform well in cases of
extreme thin trading because in extreme circumstances, the stock will not be traded at all for a
given period hence, resulting in an observed zero change in price and consequently, a zero
return.

As such, in these cases, using the standard market model estimated under the ordinary least
squares estimators would not have the desirable statistical properties of consistency,
unbiasedness and efficiency. Thus, what is desired is a configuration that separates the
modelling of the zero return observations from the non-zero return observations.

The study of Reinganum (1982) suggested an adjustment to beta estimates to correct for the
thin trading bias but did not produce betas that are large enough to explain the ‘small firm’
effect. This is the motivation of the present paper, to explore the small firm effect in providing
better-estimated betas of the Malaysian banking stocks.

2.4 The Market Model and Thin Trading

The standard beta estimated under least squares regression is

8
See Greene (2003) pp. 761-780 for detail surveys.
9
See the work of Brailsford, Faff and Oliver (1997).
 rit = αi + βi rMt+ εit (2.1)

where rit is the return for an individual stock i. rMt is the return to the market most commonly
proxied by the return to a representative index, εit is a stochastic error term assumed to be
distributed, as per IN ∼ (0, σ2 i). αi and βi are firm specific point estimates, which are assumed
constant over time, where beta represents the systematic risk for asset i. Systematic risk is of
course the slope coefficient of the market line, which may or may not vary.

As in the previous non-synchronous trading literature, the existence of thin trading will induce
bias in the estimated betas. The direction of the bias will be downward for the thinly traded
firms and upward for frequently traded firms. Thus, the betas of firms that traded at a below
‘average’ frequency will be biased downward while the betas of firms that traded at an above
‘average’ frequency will be biased upward. Further, the downward bias leads to the sensible
assumption that if thinly traded stocks are above average (relative) risk this suggests that the
estimated betas are closer to unity than the true betas.

Hence, the use of standard beta estimation will underestimate expected returns, and as stated in
the study of Roll (1981), Reinganum (1982), Dimson (1988) and Beedles, Dodd and Officer
(1988) the phenomenon will lead to the possibility that small thinly traded firms to carry
excess returns. Consequently, several studies, such as Marsh (1979); Cohen, Hawawini, Maier,
Schwartz and Whitcomb (1983a, 1983b); Booth and Smith (1985); McInish and Wood (1985);
Fowler, Rorke and Jog (1989); Boabang (1996) and Chou (1997) attempted to provide
solutions to overcome these thin trading problems.

The solution to thin trading proposed by Marsh (1979) matched asset and market returns on a
trade-by-trade basis10. This abandons the conventional assumption of some fixed, equal returns
measurement intervals such as a one day (using ‘end-day’ prices) or a one month (using ‘end
of month’) prices11.

However, the most regularly employed thin trading estimators are from the work of Scholes
and Williams (1977), Dimson (1979) and Fowler and Rorke (1983). These approaches consist
of certain variations but do have some shared elements among them as discussed in Campbell,
Lo and MacKinlay (1997). The summaries of the shared key points can be briefly gathered
from the below.

Firstly, the techniques are time series approaches. The presence of thin trading was seen as a
concern of non-synchronous trading and it reveals spurious autocorrelation problems in the
observed return data.

Secondly, the techniques were used to overcome the thin trading problem by adding leads and
lags of the market return to the market model regression. Additionally, some of the approaches
correct for the autocorrelations in the market return series.

Albeit, alternative beta estimators provide progress on the thin trading issue, the results in the
empirical work were mixed with evidence provided by Sinclair (1981); Dimson and Marsh
(1983); McInish and Wood (1986); Bartholdy and Riding (1994); and Maynes and Rumsey
(1993); Denis and Kadlec (1994); Berglund, Liljeblom and Loflund (1989).
10
Other applications, in isolation to Marsh (1979) are Dimson and Marsh (1983) and Maynes and Rumsey (1993)
11
Such a procedure induces a specific form of heteroscedasticity that needs to be controlled for in the estimated regression. For
details, see Marsh (1979, p. 849, equation 6)
The Dimson beta (Dimson (1979)) used in this paper can be useful for comparison purposes
and is expressed in the form of the following model:

rit = αi + βi-2 rMt-2 + βi-1 rMt-1 + βi0 rMt + βi1 rMt+1 + βi2 rMt+2 + εit (2.2)

and using the least squares and the Dimson beta from the relationship:
2
β iDIM = ∑ β ik (2.3)
k = −2

However, it can be conjectured that the observed zero returns will not be handled well by these
time series approaches since regressing observations of zero against the leads and lags of the
market returns do not provide further information. The presence of zero returns in the data on
rit in itself causes fundamental problems for the estimation of beta.

Thus, a new approach that separates the modelling of zero return observations from the non-
zero return observations can provide a solution to these fundamental problems. This is the
sample selectivity approach to beta estimation.

2.5 A Sample Selectivity Approach to Beta Estimation

Greene (2003, pp. 761-765, 1997, pp. 976-981) dealt with the sample selectivity model.
Further, the work of Brooks et. al. (2004) continued this using the model in the context of
using it to model returns in the presence of the “spike” of zero return observations, which is
encountered in the presence of thin trading. Specifically, the model comprises two
components: a selectivity component and a regression model. The first component deals with
the “spike”, or discreteness, in the observed data and the second component applies to the
continuous data on returns (the non-zero returns data).

In the sample selectivity model, the underlying observed data is a latent variable denoted as
z*it. The second regression component applies to the observed data on an individual asset’s
returns rit if z*it exceeds some threshold value. We assume that this latent variable is
determined via an underlying regression model with explanatory variables wit. The choice of
explanatory variable volume is the wit.

This follows from the literature of Karpoff (1987), Gallant, Rossi and Tauchen (1992); and
Hiemstra and Jones (1994) which had investigated the stock price -volume relations. Hence, wit
will comprise of a constant and trading volume. Now, if the latent variable, z*it is sufficiently
large then a non-zero return will be observed. This means in order to trigger a price change to
yield a non-zero return the trading volume needs to be sufficiently large.

Once z*it > 0 or a non-zero return is observed, the regression component will apply to the data.
That is, for all non-zero returns the traditional market model (a regression model) applies. This
makes the selectivity component to be concerned with sample (model) selection, and the
regression component with modelling the (non-zero) returns data.

Specifically, the model is,

Selectivity Component
z*it = wit γi + uit (2.4)

Where;

z*it = 1 if z*it > 0,

0 otherwise

Or,

z*it = 1 if non-zero return,

0 if zero return

This brings in a discrete choice model for the zero versus the non-zero return variable, z*it.

If we assume normality for the underlying distribution then we have a probit model with

P (z*it = 1) = Φ (w΄it γi) (2.5)

And

P (z*it = 0) = 1 - Φ (w΄it γi) (2.6)

Only when z*it = 1 or when we have a non-zero return will the regression component of the
sample selectivity model apply. For simplicity, we will assume that this regression component
can be specified as the traditional market model, but it is also possible to apply the non-
synchronous trading arguments to justify another specification (e.g. Dimson).

In this work as noted below,

rit = αi + βi rMt+ vit (2.7)

When z*it = 1.

Assuming in the sample selectivity model, in particular, the vector of stochastic variables, (uit,
vit), follows a bivariate normal distribution (0, 0, 1, σv, ρ). Thus, the selectivity and regression
components may be correlated (ρ ≠ 0 ).

In this model, we have:

E [r z = 1]= αi + βi rMt+ ρσv λ (w΄it γi) = αi + βi rMt+ θi λ (w΄it γi)

it it (2.8)

Where the “Inverse Mill’s Ratio” (IMR) is given by:

ϕ (w´ γ) it i
λ (w΄it γi) = (2.9)
Φ (w´ γ ) it i

At this point, the basis of the bias and inconsistency is now becoming clear and it is caused by
the omission of the IMR from the regression model of 2.8 (see Greene (1997)).
 3.0 RESEARCH METHODOLOGY

3.1 A Two-Step Estimation

In this work the sample selectivity is estimated by a two-step estimation procedure adopted by
Heckman (1979). This two-step procedure is easy to implement in practice and yields an
estimator that is unbiased, consistent but not fully efficient12. The procedure is as follows:

^
1. The probit selection equation is first estimated by maximum likelihood to obtain γ i and,
for this reason, next is to estimate the Inverse Mill’s Ratio refer to equation 2.8 and 2.9.

2. The regression model of αi + βi rMt + θi λ (w΄it γi) + eit, is estimated by replacing the Inverse
Mill’s Ratio with the estimated version from step 1. This second step regression has
heteroscedastic errors, thus, should be estimated by the generalized least squares estimator.
However, an ordinary least squares estimation should still produce consistent and unbiased
estimators.

3.2 Thin Trading Estimators

The Dimson beta (Dimson (1979)) used in this paper can be useful for comparison purposes.
Specifically, this paper utilized two lags and leads of the market returns. Thus, the technique is
expressed in the form of the following model as in the literature equation 2.2 and 2.3.

3.3 Selectivity Corrected Betas

Specifically, this study will utilize the technique that adjusts for the censoring induced in the
data that is, the “spike” of zero returns that occurs for stocks subject to extreme cases of thin
trading. In addition to its simplicity, the model is known to have desirable statistical properties
as it is done in a two-stage process, explained in a sample selectivity model. This model is
exemplified by a selectivity equation that deals with the “spike” and a regression model that is
applied to the non-censored data. Hence, we describe the resultant beta estimates as selectivity
corrected betas.

Many models exist for censored data depending on the perceived reasons for the occurrence of
the zeros. Whilst, many of the applications of this censored data issue are on labour economics
studies this were as such displayed in the work of Tobin (1958), Quester and Greene (1982)
and Jarque (1987). The results, however, have been applied in many other fields, including in
empirical finance [Heckman (1979), Greene (1983), and Maddala (1989) etc.] and in other
researchers13. The models differ according to the type of censoring and the assumptions made
concerning the underlying data generating process refer to equation 2.4 and 2.5 in the previous
chapter.

From this development, the study of Blundell and Meghir (1987) proposed a range of two
equation models to use with censored data. However, in this work, only one such model is
being considered, i.e., the sample selectivity model which is applied to the modelling of returns

12
Another potential technique is estimation by maximum likelihood.
13
See Greene (2003) pp. 761-780 for detail surveys.
 in the presence of zero returns. Thus, this model is suitable for particular relevance of thin
trading and was this thoroughly explained in the literature; refer to equation 2.6.

3.3.1 Data

The data used in this analysis is sourced from Arab Malaysian Securities using the adjusted
daily closing prices of all the Malaysian banks listed on the first board stocks over the period
of 2 January 1998 to 29 December 2000. The representative market index is measured as the
return of KLCI listed companies weighted market portfolio. Eviews is used for the
econometric modelling.

4.0 RESEARCH FIDIGS

4.1 Some Basic Descriptive Statistics

As in Table 4.1, the mean market capitalization size over the period 1998 to 2000 of individual
bank varies in the range of RM 230.60 million the lowest and to about RM 24, 956.54 million
the highest. This comes about to about RM 3, 640.77 million in average of all banks mean
market capitalization size, for the full sample and this is summarized in the end row of Table
4.1.

Meanwhile, the median market capitalization size for individual bank range from about RM
235.09 million to about RM 28, 081.34 million. The average median market capitalization size
for all banks is about RM 3, 936.67 million. The mean volume for individual banks varies in
the range of about 1, 213.00 unit shares daily to about 4, 824, 981.00 million unit shares per
day. The average mean volume of all banks is about 1, 459, 765.00 million unit shares per day.
The median volume reached 3, 477, 048.00 million unit shares the highest and about 500.00
unit shares per day as the lowest. The average median volume amounted to about 976, 568.00
unit shares per day.

The preliminary judgment of some the Malaysian banking stocks may be associated with thin
trading due to frequent zero returns i.e. HHF, PMF, and BHL14. Thus, the selectivity model
applied in this thesis will give some downward bias from the standard estimators15. Thus, this
downward bias will produce increased estimates to the selection sample. This is supported with
the degree of censoring that reached to about 85 percent at the highest and about 15 percent at
the lowest. This figure comes to about 660 zero observations in the return series with about
115 zero observations at the minimum during the sample period of 775 days16. The figures are
as provided in Table 4.2.

Further, as reflected in Table 4.3, similar results are established as in the previous literature.
Size is negatively correlated with the degree of censoring at -0.228. The correlation of size to
volume shows quite strong correlations of 0.676. Moreover, the volume is negatively
correlated with the degree of censoring at -0.404.

14
See also the results of LM-Test and the results of beta estimations in previous Chapter III.
15
For thinly traded firms, the direction of the bias will be downward; meanwhile, for the frequently traded firms the direction of
the bias will be upward.
16
In order to run the Dimson estimator with two leads and lags of the market return, at least seven zero observations in non-zero
observations of 250 days sample period are required.
 Table 4.1: The Descriptive Statistics of Size (Market Capitalization) and Volume of All Banks over the period
of 1998 to 2000

MEA SIZE MEDIA SIZE MEA VOLUME MEDIA VOLUME

BAK (RMM) (RMM) (UIT) (UIT)
AH 2, 082.32 1, 946.81 489, 300.00 257, 980.00
AMM 3, 801.70 3, 637.37 4, 824, 981.00 3, 477, 048.00
BHL 983.25 977.45 10, 692.00 2, 000.00
BIM 1, 036.65 1, 030.23 71, 267.00 29, 000.00
CAH 8, 435.51 10, 414.32 4, 590, 982.00 3, 160, 000.00
HHF 230.60 235.09 24, 097.00 12, 000.00
HHL 541.93 557.30 97, 041.00 54, 000.00
HL 3, 455.62 3, 413.03 885, 510.00 534, 000.00
MAY 24, 956.54 28, 081.34 4, 266, 432.00 3, 291, 600.00
PMF 352.74 346.77 1, 213.00 500.00
PML 813.99 813.93 58, 736.00 27, 500.00
PBF 2, 795.20 3, 019.36 2, 095, 311.00 1, 523, 437.00
PBL 5, 652.25 6, 275.79 3, 471, 374.00 2, 285, 156.00
RHB 5, 939.93 5, 835.10 2, 859, 742.00 1, 946, 000.00
SBF 742.36 707.40 191, 208.00 70, 000.00
SBL 1, 869.63 1, 713.47 232, 050.00 118, 000.00
SURIA 676.70 708.32 1, 415, 209.00 592, 000.00
UTAMA 1, 166.98 1, 147.04 690, 628.00 198, 000.00
TOTAL 65, 533.91 70, 860.11 26, 275, 773.00 17, 578, 221.00
AVERAGE 3, 640.77 3, 936.67 1, 459, 765.00 976, 568.00

Table 4.2: umber of Zero Observations in the Return Series and Degree of Censoring of Each Bank.

ZERO TOTAL DEGREE

BAK OBSERVATIOS OBSERVATIOS CESORIG
AH 144 775 0.186
AMM 114 775 0.147
BHL 473 775 0.610
BIM 194 775 0.250
CAH 140 775 0.181
HHF 295 775 0.381
HHL 164 775 0.212
HL 168 775 0.217
MAY 151 775 0.195
PMF 655 775 0.845
PML 150 775 0.194
PBF 116 775 0.150
PBL 171 775 0.221
RHB 147 775 0.190
SBF 234 775 0.302
SBL 148 775 0.191
SURIA 112 775 0.145
UTAMA 117 775 0.151
 Table 4.3: The Pearson Correlation of Censoring and Average
Size and Average Volume.

Correlation of Censoring & Size - 0.228

Correlation of Censoring &
Volume - 0.404
Correlation of Volume & Size 0.676

4.2 A Comparison of Beta Estimates

The betas are categorized as follows (1) the standard OLS; (2) the OLS with sample selection
correction; (3) the standard Dimson with two leads and lags; and (4) the Dimson with the
sample selection correction. As summarized in Table 4.4, the Dimson beta estimator is first
compared against the Dimson selectivity model and the results showed some variation across
banks, even though such variation is minimal.

The highest change is only about a one percent higher value for the BHL with the Dimson
selectivity model. However, the results of the other banks varies, with some higher and some
lower with these two different estimators. Similar results are produced by the ordinary least
squares method. The results vary across banks and with mixed results some higher and some
lower, with the ordinary least squares selectivity model.

However, the variation is slightly lower than the Dimson selectivity model. In Table 4.5, the
two selectivity models are compared to see the changes. The highest variation can be seen at
PMF with the ordinary least squares selectivity model producing a higher estimate by 3.5
percent. The results of the changes are quite consistent for the standard Dimson estimator as
compared with the standard ordinary least squares estimator. The change pattern is almost the
same for the standard model of these two estimators with different selectivity models.

As noted earlier, if the Malaysian banking stocks may be associated with thin trading, the
results should give some downward bias thus, the use of a standard estimator will understate
expected returns. The results of the study here, seems mixed giving some lower and some
higher estimates. Even though that, the changes in the different estimations are still minimal. It
is plausible to see such a result as the banking sector is a large business sector in the economy.
This paper, however, highlights the importance of thin trading and its alternative estimator.
These estimators are potentially useful to be applied in other small firms with thinly traded
stocks.
 Table 4.4: Dimson and Dimson Selectivity Beta Measurements.

BAK DIMSO DIMSO SELECTIVITY OLS OLS SELECTIVITY

PMF 0.254 0.254 0.288 0.288
BHL 0.265 0.275 0.289 0.301
HHF 0.471 0.471 0.469 0.469
SBF 0.581 0.582 0.584 0.585
SBL 0.645 0.646 0.641 0.641
BIM 0.704 0.706 0.710 0.712
HHL 0.751 0.751 0.751 0.751
PML 0.773 0.773 0.792 0.792
PBL 0.847 0.847 0.850 0.850
HL 0.919 0.920 0.924 0.925
MAY 1.013 1.013 1.021 1.021
PBF 1.036 1.036 1.029 1.029
UTAMA 1.147 1.147 1.148 1.148
AH 1.293 1.294 1.299 1.299
AMM 1.330 1.331 1.333 1.335
CAH 1.390 1.389 1.388 1.387
SURIA 1.426 1.428 1.435 1.436
RHB 1.517 1.519 1.522 1.523

Table 4.5: The Dimson and OLS Selectivity and Standard Dimson and OLS
Beta Measurement Changes

% CHAGE % CHAGE STADARD % CHAGE DIMSO

% CHAGE STADARD OLS & DIMSO & DIMSO SELECTIVITY & OLS
BAK (DIMSO & OLS) OLS SELECTIVITY SELECTIVITY SELECTIVITY
AH -0.54 -0.02 -0.04 -0.52
AMM -0.32 -0.17 -0.17 -0.32
BHL -2.36 -1.18 -0.96 -2.59
BIM -0.59 -0.19 -0.19 -0.59
CAH 0.17 0.03 0.03 0.16
HHF 0.22 -0.01 0.03 0.19
HHL 0.06 0.00 0.00 0.06
HL -0.48 -0.08 -0.07 -0.49
MAY -0.72 0.00 0.01 -0.73
PMF -3.42 0.03 0.03 -3.42
PML -1.88 -0.02 -0.03 -1.86
PBF 0.72 0.00 0.00 0.72
PBL -0.31 -0.06 -0.06 -0.30
RHB -0.50 -0.09 -0.14 -0.45
SBF -0.29 -0.10 -0.10 -0.28
SBL 0.46 -0.02 -0.06 0.50
SURIA -0.87 -0.16 -0.19 -0.84
UTAMA -0.10 -0.02 -0.03 -0.09
5.0 COCLUSIO AD FUTURE THOUGHTS

This study examines the effects of economic changes to bank risk using macro econometric and
financial time series modelling due from censoring, size and volume of banking stocks.
Specifically, the work looks into the empirical cumulative distribution of bank betas due to thin
trading and alternative beta risk estimator (sample selectivity model) to calculate risk and
returns of banks in Malaysia.

The findings of this work also provide further insights for Malaysian banks to sustain their
competitiveness in better estimates of bank betas. The contribution to knowledge building of
this work is clearly suggested from the advanced methodology and statistical analyses utilized.

This work discovers several important areas in relation to risk of the banking sector covering
data beginning 1998 to the year 2000. The aspect of combining the size, volume and censoring
element have enriches the study in the process of better estimated risks. The subsequent sub
topic will highlight major discoveries of this work.

5.1 Thin Trading and Sample Selectivity Model

The effort to analyse thin trading and sample selectivity model rose from the preliminary
judgment of the Malaysian banking stocks that may be associated with thin trading from the
findings of non-significance LM-test and the tabulation of zero returns that indicate very
frequent small returns in the bank return series in certain banks. Thus, an alternative beta risk
estimator called the sample selectivity model is used to cope with situation of extreme thin
trading, of which suitable for frequent zero returns in the return series. When compared with the
standard market model estimator and the existing thin trading estimator, this technique is
expected to work better due to its desirable statistical properties. This alternative technique
adjusts for the censoring induced in the data of the “spike” of zero returns that arises for stocks
in extreme cases of thin trading.

The correction for censoring is not significant in Malaysian banking stocks for the period 1998-
2000 (as observed in this chapter). It is expected. Malaysian banking industry is a major
industry in the country whereby it contributes almost 80 percent to the country’s assets.
Nevertheless, the censoring and sample selection model can be applied to small industries.

The degree of censoring in this sample is about 85 percent at the highest and at the lowest 15
percent. This established the possibilities presence of thin trading in Malaysian banking stocks.
However, the non-significant presence explains the minimal changes in the different estimators.

The results of this paper support previous literature on relationship between censoring and firm
size, volume and firm size, and censoring and volume (such as Brooks et al., 2004 and Lange,
1999). This indicates that the sample selection model can be applied in thinly traded shares
studies besides labour economic studies (Greene, 2003).

The general application of the Dimson beta to the Malaysian banking return series with two
leads and lags also gave mixed results with ordinary least squares producing higher results in
some banks. This leads to an interest in exploring other thin trading estimators like Fowler and
Rorke (1983) and Scholes and Williams (1977) to obtain better information on thin trading
issues in the Malaysian-banking scene. The paper discussed the importance of censoring and
thin trading as alternative estimators for beta measurement in situations of thinly traded stocks.

5.2 Implications of Study

The issue on risk in relation to censoring, size and volume on the Malaysian banking stocks are
conveyed in few interrelated perspectives.

(1) Utilization of econometric modelling techniques of risk over the period 1998 to 2000;
(2) The continuation of effort in better estimated beta from the impact of turbulences in the
economy i.e. of mid -1997 incident crisis on the banking stocks using the macro banking
data;
(3) The variation in risk estimation is more pronounced in thinly traded sectors via the
sample selectivity method;
(4) Malaysia is a bank backed economy that using sample selection method plausibly
showed minimal variation in the calculation of bank risks.

Explicitly, the work is potentially beneficial for,

1. Banks as the provider of information for analysis can benefit from the results of the
research in terms of investigation, identification, measurement and justification towards
their responses to wealth maximization activities.

2. During the development of this work, policy makers had provided necessary information
on policies and their objectives; and impartial opinion on banks. The results from the
work analysis will enhance the government’s opinion in justifying how resilient
Malaysian banks operate in the increased competitive pressures, in response to the general
globalization of markets.

3. In protecting interest, investors are concerned about how risky their investments activities
to ensure that banks will not undertake any activities that are damaging to their wealth.

4. Customers want to trust the bank on their deposits thus; this work provides greater
transparencies on the information of bank risk and stability.

5. Academics, who want to have greater depth in the study of risk and stability in the
Malaysian-banking sector, can continue to suggest proactive economic solutions to the
policy makers, banks, customers and investors.

5.3 Scope for Further Research

The primary focus of this work is to investigate measure and examine the risk of banks in
Malaysia. The work can be further developed by extending the emphasis to other areas such as
the microeconomic study in relation to theory and empirical study. This will be about bank
indicators, benchmarking and signalling to ensure credibility and viability of banks in Malaysia.

This study is especially imperative when banking industry is commonly identified with
imperfect information. This can also be extremely useful in discovering the role of banks in the
Malaysian economy. As well, this can be an indicative medium to signal for any structural
weaknesses in the banking sector in order to justify as and when the government should
intervene to avoid the bank panics and runs, solvency problems and so on. Additionally, the
study on the macroeconomic consequences due to financial imperfections will also bring this
banking study to a higher level. Other econometric modelling can also be explored for
comparison purposes for risk.

5.4 Future Thoughts

The overall aspect of this work answers the issue on beta estimations via thin trading (Dimson
Beta) and sample selectivity methodology. The econometric models employed extend the
application of financial models in relation to risk assessments. Even though that, there are other
potential implication to note with regard to beta estimations. Thus, especially useful to consider
the period and size oriented study in respect to beta estimations since, stationarity of betas have
important implications on capital asset pricing theory and performance, efficient market
hypothesis and, more importantly in the forecasting of stock returns.

In Malaysia, the financial institutions would need to transform to remain innovative and
responsive to the demands of their customers; efforts need to be directed to facilitate financing
by non-banks for high-risk ventures. These will include financing for knowledge and
technology intensive start up enterprises where intangible collateral are the principal assets. As
such, these knowledge and technology intensive enterprises will need alternative forms of
financing to complement traditional financing sources.

However, foremost, the Malaysian economy needs to continue to be forward looking in meeting
challenges of the new millennium given the dynamism of the international environment. Being
met with episodes of turbulence, the economic stability is not so interrupted like the Latin
American countries in terms of scale and duration. The financial sector’s infrastructure will
need to change to accommodate the substantial financing requirements of new activities and
industries in the economy. Thus, the sector needs to be crucially responsive and aggressive
enough towards new financing concepts to support the changes in the economy, for Malaysia to
be structurally strong and well equipped in competing towards the globalization of markets.

5.5 Summary Conclusion

The result in this work demonstrates that correction for censoring is not significant in Malaysian
banking stocks for the period in this sample. These results are expected as banking has been the
major industry in the country whereby it contributes almost 80 percent to the country’s assets.
Thus, this study on censoring and sample selection can be applied to other small industries in
the country that are associated with thinly traded stocks, i.e. Small firms. The thesis discussed
the importance of censoring and thin trading as alternative estimators for beta measurement in
situations of thinly traded stocks.

This paper supports the previous literature on the negative relationship between the censoring
and firm size, and censoring and volume. In addition, volume and firm size is positively
correlated. Also, the degree of censoring in this sample is about 85 percent at the highest and at
the lowest 15 percent. This established the possibilities presence of thin trading in Malaysian
banking stocks. However, the non-significant presence explains the minimal changes in the
different estimators.
 The general application of the Dimson beta to the Malaysian banking return series with two
leads and lags also gave mixed results with ordinary least squares producing higher results in
some banks. This leads to an interest in exploring other thin trading estimators like Scholes and
Williams (1977) and Fowler and Rorke (1983) to obtain better information on thin trading
issues in the Malaysian banking scene.

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