IDEAS home Printed from https://ideas.repec.org/a/sae/padigm/v22y2018i2p160-174.html
   My bibliography  Save this article

Predicting Market Betas

Author

Listed:
  • T.G. Saji

Abstract

This research, using firm-level data on NSE listed stocks for the period of 2008–2015, seeks empirical evidence on the significance of company characteristics in prediction of market betas in Indian context. The empirical methodology involves two-stage statistical procedure where an exploratory factor framework determines the historical relationship between firms’ fundamentals and systematic risk at first, and a generalized least square (GLS) technique of panel regression modelling estimates their predictive power thereafter. The search process discovers debt ratios and returns on investment predict market betas in Indian stock market. The study strongly suggests that the use of 1-year lagged historical betas along with the measures of financial leverage and overall profitability produces better predictions than the benchmark predictions solely based on historical betas. However, the analysts need to consider the industry differences in systematic risk to enhance the predictive power of the model.

Suggested Citation

  • T.G. Saji, 2018. "Predicting Market Betas," Paradigm, , vol. 22(2), pages 160-174, December.
    • Handle: RePEc:sae:padigm:v:22:y:2018:i:2:p:160-174
    DOI: 10.1177/0971890718787942
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0971890718787942
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0971890718787942?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Nicola Borri & Marianna Caccavaio & Giorgio Di Giorgio & Alberto Maria Sorrentino, 2014. "Systemic Risk in the Italian Banking Industry," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 43(1), pages 21-38, February.
    2. Woo Gon Kim & Bill Ryan & Silvio Ceschini, 2007. "Factors Affecting Systematic Risk in the US Restaurant Industry," Tourism Economics, , vol. 13(2), pages 197-208, June.
    3. Gwangheon Hong & Sudipto Sarkar, 2007. "Equity Systematic Risk (Beta) and Its Determinants," Contemporary Accounting Research, John Wiley & Sons, vol. 24(2), pages 423-466, June.
    4. Blume, Marshall E, 1979. "Betas and Their Regression Tendencies: Some Further Evidence," Journal of Finance, American Finance Association, vol. 34(1), pages 265-267, March.
    5. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    6. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    7. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. "Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
    8. Peter Christoffersen & Kris Jacobs & Gregory Vainberg, 2007. "Forward-Looking Betas," CREATES Research Papers 2007-39, Department of Economics and Business Economics, Aarhus University.
    9. Brent W. Ambrose & Michael J. Highfield & Peter D. Linneman, 2005. "Real Estate and Economies of Scale: The Case of REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(2), pages 323-350, June.
    10. Moyer, R. Charles & Chatfield, Robert, 1983. "Market power and systematic risk," Journal of Economics and Business, Elsevier, vol. 35(1), pages 123-130.
    11. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
    12. Henry Kaiser, 1974. "An index of factorial simplicity," Psychometrika, Springer;The Psychometric Society, vol. 39(1), pages 31-36, March.
    13. Hamada, Robert S, 1972. "The Effect of the Firm's Capital Structure on the Systematic Risk of Common Stocks," Journal of Finance, American Finance Association, vol. 27(2), pages 435-452, May.
    14. Kim, Dongcheol, 1997. "A Reexamination of Firm Size, Book-to-Market, and Earnings Price in the Cross-Section of Expected Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(4), pages 463-489, December.
    15. Tobias Schlueter & Soenke Sievers, 2014. "Determinants of market beta: the impacts of firm-specific accounting figures and market conditions," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 535-570, April.
    16. Franzoni, Francesco, 2006. "Where is beta going ? the riskiness of value and small stocks," HEC Research Papers Series 829, HEC Paris.
    17. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    18. repec:pri:cepsud:91malkiel is not listed on IDEAS
    19. Francesco Franzoni, 2006. "Where is Beta Going ? The Riskiness of Value and SmallStocks," Post-Print halshs-00009862, HAL.
    20. Franklin Allen & Elena Carletti, 2013. "Systemic risk from real estate and macro-prudential regulation," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 5(1/2), pages 28-48.
    21. Patro, Dilip K. & Wald, John K., 2005. "Firm characteristics and the impact of emerging market liberalizations," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1671-1695, July.
    22. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    23. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    24. Bowman, Robert G, 1979. "The Theoretical Relationship between Systematic Risk and Financial (Accounting) Variables," Journal of Finance, American Finance Association, vol. 34(3), pages 617-630, June.
    25. Mandelker, Gershon N. & Rhee, S. Ghon, 1984. "The Impact of the Degrees of Operating and Financial Leverage on Systematic Risk of Common Stock," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(1), pages 45-57, March.
    26. Olibe, Kingsley O. & Michello, Franklin A. & Thorne, Jerry, 2008. "Systematic risk and international diversification: An empirical perspective," International Review of Financial Analysis, Elsevier, vol. 17(4), pages 681-698, September.
    27. Jacquier, Eric & Titman, Sheridan & YalçIn, Atakan, 2010. "Predicting systematic risk: Implications from growth options," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 991-1005, December.
    28. Francesco Franzoni, 2006. "Where is Beta Going ? The Riskiness of Value and Small Stocks," Post-Print halshs-00125691, HAL.
    29. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    30. Hilscher, Jens Dietrich & Campbell, John Y. & Szilagyi, Jan, 2011. "Predicting Financial Distress and the Performance of Distressed Stocks," Scholarly Articles 9887619, Harvard University Department of Economics.
    31. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    32. Hung, Jung-Hua & Liu, Yong-Chin, 2005. "An examination of factors influencing airline beta values," Journal of Air Transport Management, Elsevier, vol. 11(4), pages 291-296.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Qianwei Ying & Tahir Yousaf & Qurat ul Ain & Yasmeen Akhtar & Muhammad Shahid Rasheed, 2019. "Stock Investment and Excess Returns: A Critical Review in the Light of the Efficient Market Hypothesis," JRFM, MDPI, vol. 12(2), pages 1-22, June.
    2. Amir Amel†Zadeh, 2011. "The Return of the Size Anomaly: Evidence from the German Stock Market," European Financial Management, European Financial Management Association, vol. 17(1), pages 145-182, January.
    3. González-Sánchez, Mariano, 2022. "Factorial asset pricing models using statistical anomalies," Research in International Business and Finance, Elsevier, vol. 60(C).
    4. Mariia Bondarenko & Karel Brůna, 2021. "The Impact of FX Exposure on the Firm's Stock Market Return," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2021(1), pages 45-70.
    5. Dionysia Dionysiou, 2015. "Choosing Among Alternative Long-Run Event-Study Techniques," Journal of Economic Surveys, Wiley Blackwell, vol. 29(1), pages 158-198, February.
    6. Gabriel Hawawini & Donald B. Keim, "undated". "The Cross Section of Common Stock Returns: A Review of the Evidence and Some New Findings," Rodney L. White Center for Financial Research Working Papers 08-99, Wharton School Rodney L. White Center for Financial Research.
    7. Liu, Hao & Zhang, Hao & Gao, Ya-Chun & Chen, Xu-Dong, 2022. "Firm age and beta: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 244-261.
    8. Stefano Gubellini, 2014. "Conditioning information and cross-sectional anomalies," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 529-569, October.
    9. Taufiq Choudhry & Ranadeva Jayasekera, 2015. "Level of efficiency in the UK equity market: empirical study of the effects of the global financial crisis," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 213-242, February.
    10. Tienyu Hwang & Simon Gao & Heather Owen, 2014. "Markowitz efficiency and size effect: evidence from the UK stock market," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 721-750, November.
    11. Madhusmita Bhadra & Doyeon Kim, 2023. "Income elasticity of demand and stock market beta," International Finance, Wiley Blackwell, vol. 26(2), pages 225-240, August.
    12. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2017. "Research in finance: A review of influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 188-199.
    13. Israel, Ronen & Moskowitz, Tobias J., 2013. "The role of shorting, firm size, and time on market anomalies," Journal of Financial Economics, Elsevier, vol. 108(2), pages 275-301.
    14. Doran, James & Jiang, Danling & Peterson, David, 2007. "Short-Sale Constraints and the Non-January Idiosyncratic Volatility Puzzle," MPRA Paper 4995, University Library of Munich, Germany.
    15. Guo, Hui, 2006. "Time-varying risk premia and the cross section of stock returns," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 2087-2107, July.
    16. Manuel Ammann & Michael Steiner, 2008. "Risk Factors for the Swiss Stock Market," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 144(I), pages 1-35, March.
    17. Anton Astakhov & Tomas Havranek & Jiri Novak, 2019. "Firm Size And Stock Returns: A Quantitative Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 33(5), pages 1463-1492, December.
    18. Cooper, Michael J. & Gubellini, Stefano, 2011. "The critical role of conditioning information in determining if value is really riskier than growth," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 289-305, March.
    19. Bennett, Donyetta & Mekelburg, Erik & Williams, T.H., 2023. "BeFi meets DeFi: A behavioral finance approach to decentralized finance asset pricing," Research in International Business and Finance, Elsevier, vol. 65(C).
    20. Lin, Qi, 2017. "Noisy prices and the Fama–French five-factor asset pricing model in China," Emerging Markets Review, Elsevier, vol. 31(C), pages 141-163.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:padigm:v:22:y:2018:i:2:p:160-174. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.