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An Examination of Blume and Vasicek Betas

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  • Lally, Martin

Abstract

This paper examines the Vasicek and Blume methods for correcting OLS betas. The primary conclusions are that typical applications of Vasicek's method seem to mistakenly equate the prior distribution with the cross-sectional distribution of estimated rather than true betas, that Blume's implicit forecast of any tendency for true betas to regress towards one may not be desirable, that preliminary partitioning of firms into industry type groups (as is typical for Vasicek) is desirable, and that conversion of OLS equity betas to asset betas before applying the correction process is also desirable. Copyright 1998 by MIT Press.

Suggested Citation

  • Lally, Martin, 1998. "An Examination of Blume and Vasicek Betas," The Financial Review, Eastern Finance Association, vol. 33(3), pages 183-197, August.
    • Handle: RePEc:bla:finrev:v:33:y:1998:i:3:p:183-97
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    Cited by:

    1. Juan Carlos Gutierrez Betancur, 2017. "Robust Estimation of beta and the hedging ratio in Stock Index Futures In the Integrated Latin American Market," Revista Ecos de Economía, Universidad EAFIT, vol. 21(44), pages 37-71, June.
    2. Pedro Antonio Martín-Cervantes & María del Carmen Valls Martínez, 2023. "Unraveling the relationship between betas and ESG scores through the Random Forests methodology," Risk Management, Palgrave Macmillan, vol. 25(3), pages 1-29, September.
    3. Dmitry Bazhutov & André Betzer & Richard Stehle, 2023. "Beta estimation in the European network regulation context: what matters, what doesn’t, and what is indispensable," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 37(3), pages 239-275, September.

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