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Estimating the beta-return relationship by considering the sign and the magnitude of daily returns

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  • Ben Sita, Bernard

Abstract

We test the beta-return relationship under the working assumption that beta is realized under constrained but innovative trading environments. Specifically, we estimate a residual beta risk as the difference between a probability-weighted realized beta and an ordinary least squares (OLS) beta, and test the beta-return relationship using daily returns on the U.S. stock market factor and 30 U.S. industries. Our estimates of the market risk premium using the cross-sectional regression (CSR) of Fama and MacBeth (1973) over a period spanning from 1926/07 to 2014/12 are in line with the central prediction of the capital asset pricing model (CAPM) that the realized return is linearly related to beta.

Suggested Citation

  • Ben Sita, Bernard, 2018. "Estimating the beta-return relationship by considering the sign and the magnitude of daily returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 28-35.
    • Handle: RePEc:eee:quaeco:v:67:y:2018:i:c:p:28-35
    DOI: 10.1016/j.qref.2017.04.010
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    More about this item

    Keywords

    G12; C52; Asset pricing; CAPM; HML; SMB; Cross-sectional regression;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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