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The Journal of Alternative Investments

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Primary Article

Over the Counter Bulletin Board Exchange

The Impact of Liquidity and Size to Return, Volatility, and Bid/Ask Spread

Carl Luft and Lawrence M. Levine
The Journal of Alternative Investments Winter 2004, 7 (3) 95-106; DOI: https://doi.org/10.3905/jai.2004.461461
Carl Luft
An associate professor of finance at DePaul University in Chicago, IL.
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  • For correspondence: cluft@depaul.edu
Lawrence M. Levine
Director of Corporate Finance Services at American Express Tax and Business Services Inc. in Chicago, IL.
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  • For correspondence: lawrence.m.levine@aexp.com
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Abstract

This study was motivated by the lack of empirical research performed on securities traded on the over the counter bulletin board exchange (“OTC-BB” or the “Exchange”). It extends prior research on this market by studying the impact of market capitalization and liquidity to return, volatility and components of the bid-ask spread. The time period analyzed runs from January 1, 1996 through December 31, 2000. The authors calculate return, volatility, Sharpe ratio, spread, and turnover for 10 equal-size deciles exclusively using OTC-BB traded securities. They find that an investment strategy that focuses on the largest OTC-BB firms provides relatively the highest risk-return trade-off in this market during the period January 1996? December 2000. These findings are consistent with an earlier article by the authors that suggests that a trading strategy of OTC-BB securities will not yield an appropriate risk-return trade-off as measured by the Sharpe ratio. In addition, they find that competition appears to be increasing as the relative bid/ask spread for OTC-BB securities declines. Finally, they observe that the behavior of the market participants trading OTC-BB securities (“traders”) is consistent with the behavior exhibited by New York Stock Exchange (“NYSE”) specialists.

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The Journal of Alternative Investments
Vol. 7, Issue 3
Winter 2004
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Over the Counter Bulletin Board Exchange
Carl Luft, Lawrence M. Levine
The Journal of Alternative Investments Dec 2004, 7 (3) 95-106; DOI: 10.3905/jai.2004.461461

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Over the Counter Bulletin Board Exchange
Carl Luft, Lawrence M. Levine
The Journal of Alternative Investments Dec 2004, 7 (3) 95-106; DOI: 10.3905/jai.2004.461461
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