Risk and Trading on London’s Alternative Investment Market

The alternative investment market (AIM) has seen rapid growth over its 19 years, and has emerged as the market of choice for smaller, newer companies, both in the UK and abroad. However, it has often had a volatile reputation among investors, who have commonly perceived stock in the AIM as more risky than the main market. In this book, a group of leading financial analysts conduct an extensive empirical study to compare the relative volatility of two UK equity markets run by the London Stock Exchange, over a ten year period. They analyse the comparative risks involved in the alternative investment market, the market of growing companies, and the 'main market', the market for more established companies. This book analyses the volatility of the alternative investment market, using a variety of techniques and approaches. It compares the volatility of stocks in the markets, exploring variables such as size, industry, age and market switches. Using refined methods to focus on the difference between the markets, the authors provide a convincing study to challenge the idea that the alternative investment market is higher risk than the main market.

The alternative investment market (AIM) has seen rapid growth over its 19 years, and has emerged as the market of choice for smaller, newer companies, both in the UK and abroad.

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