Risk and Trading on London's Alternative Investment Market

John Board is Dean at the Henley Business School, University of Reading, UK, and was previously Director of the ICMA Centre, University of Reading, UK. His recent research has focused on the organisation and regulation of financial markets. Alfonso Dufour is Associate Professor of Finance at the ICMA Centre, University of Reading, UK. He has a background in financial econometrics and has conducted extensive research on market structures, intraday dynamics of asset prices, and liquidity. Yusuf Hartavi is currently pursuing his PhD in the area of market microstructure at the ICMA Centre, University of Reading, UK, having obtained an MSc in International Securities, Investment and Banking. He has held professional positions at UniCredit Group as an Internal Auditor and at Istanbul Development Agency, the local authority for regional development. Charles Sutcliffe is Professor of Finance at the ICMA Centre, University of Reading, UK. Previously he was Professor of Finance and Accounting at the University of Southampton; Visiting Professor at the London School of Economics and Political Science; and Northern Society Professor of Accounting and Finance at the University of Newcastle upon Tyne, UK.Stephen Wells is an independent Consultant in Financial Market Development. His interest focuses on equity and bond markets in developed and developing countries, with particular emphasis on markets for smaller companies.

• 1. Abstract 2. Introduction 3. Activities 4. Interviews 5. Literature Review 5.1. Background on AIM 5.2. Literature Review of Empirical Studies of Small Cap Markets 5.3. Initial Public Offerings 5.4. Delisting 5.5. Risk 5.6. Other Empirical Studies 5.7. Conclusions 6. Empirical Analysis 6.1. Data Preparation and Sample Selection 6.2. Adjustments to the Data 6.3. Survivorship Bias 7. Preliminary Data Analysis 7.1. Market Value 7.2. Industry Groupings 7.3. Age 7.4. Liquidity 8. Volatility Estimation 8.1. Volatility Estimates Based on Daily Representative Prices 8.1.1. Standard Deviation 8.1.2. Garman-Klass 8.1.3. Squared Returns 8.2. Volatility Estimates Based on Intraday Prices 8.2.1. Sum of Squared Returns 8.2.2. Daily Garman-Klass 8.2.3. Rogers-Satchell Volatility Estimator 8.2.4. Yang-Zhang Volatility Estimator 8.3. Period 8.4. Portfolios 9. Basic Analysis of Relative Volatility 10. Relative Risk Allowing for Size, Age or Liquidity 10.1. Size 10.2. Industry 10.3. Age 10.4. Liquidity and Market Volatility 11. Portfolio Effects 55 12. Regression Analyses with Multiple Variables 12.1. Regression Model 12.2. Regression Results 13. Market-Switching Stocks 13.1. Switching Stocks 13.2. Relative Volatility Analysis for Market Switching Stocks 13.3. Switchers' Risk Relative to the Market 14. GARCH Analysis of Switchers 14.1. Introduction to GARCH 14.2. GARCH Results 15. Conclusions 16. References Appendix