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Simply Better Market Betas

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  • Ivo Welch

Abstract

This paper introduces a robust and easy-to-implement one-pass market-beta estimator. It only requires first winsorizing daily stock rates of return at −2 and +4 times the contemporaneous market rate of return. In predicting future market-betas, this “slope-winsorized†beta estimator predicts future betas better not only than OLS betas, Bloomberg betas (ubiquitous on financial websites), and Vasicek (1973) betas, but also published estimators that require intra-day data, super-computers, or financial statements. Moreover, using weighted-least squares to exponentially decay the weight of aged return observations (with a half-life of about four months) further improves the estimates.

Suggested Citation

  • Ivo Welch, 2022. "Simply Better Market Betas," Critical Finance Review, now publishers, vol. 11(1), pages 37-64, February.
    • Handle: RePEc:now:jnlcfr:104.00000108
    DOI: 10.1561/104.00000108
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    References listed on IDEAS

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    1. Lo, Andrew W & MacKinlay, A Craig, 1990. "Data-Snooping Biases in Tests of Financial Asset Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 431-467.
    2. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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    Cited by:

    1. Hollstein, Fabian & Prokopczuk, Marcel, 2022. "Testing Factor Models in the Cross-Section," Journal of Banking & Finance, Elsevier, vol. 145(C).
    2. Campello, Murillo & Connolly, Robert A. & Kankanhalli, Gaurav & Steiner, Eva, 2022. "Do real estate values boost corporate borrowing? Evidence from contract-level data," Journal of Financial Economics, Elsevier, vol. 144(2), pages 611-644.
    3. Novy-Marx, Robert & Velikov, Mihail, 2022. "Betting against betting against beta," Journal of Financial Economics, Elsevier, vol. 143(1), pages 80-106.
    4. Baoqing Gan, 2020. "Does Social Media Sentiment Trump News?," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5-2020.
    5. Han, Xing & Li, Kai & Li, Youwei, 2020. "Investor overconfidence and the security market line: New evidence from China," Journal of Economic Dynamics and Control, Elsevier, vol. 117(C).
    6. Iachan, Felipe S. & Silva, Dejanir & Zi, Chao, 2022. "Under-diversification and idiosyncratic risk externalities," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1227-1250.

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    More about this item

    Keywords

    Market beta; Factor exposures; Robust estimation;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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