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Estimating Betas and Stock-Return Correlations From Monthly Data: A Warning Note

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  • Daniella Acker
  • Nigel W. Duck

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    Abstract

    The empirical finance literature makes extensive use of 'monthly' stock returns, where a monthly return is the change in stock price between one particular day of the calendar month - which we term the reference day - and the corresponding day of the following month. We show that estimates of betas and stock-market correlations are highly sensitive to the choice of reference day and we suggest that studies based on such estimates can be unreliable. We support this claim by carrying out two small-scale empirical studies showing in each case that the results of critical tests are dependent upon the choice of reference day.

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    File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp04557.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 04/557.

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    Length: 36 pages
    Date of creation: Jan 2004
    Date of revision:
    Handle: RePEc:bri:uobdis:04/557

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    Keywords: betas; international correlations; estimation risk;

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    1. ROCKINGER, Michael & JONDEAU, Eric, 2001. "Testing for differences in the tails of stock-market returns," Les Cahiers de Recherche 739, HEC Paris.
    2. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    3. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
    4. Kee-Hong Bae & G. Andrew Karolyi & René M. Stulz, 2003. "A New Approach to Measuring Financial Contagion," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 717-763, July.
    5. Frankfurter, George M. & Phillips, Herbert E. & Seagle, John P., 1971. "Portfolio Selection: The Effects of Uncertain Means, Variances, and Covariances," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 6(05), pages 1251-1262, December.
    6. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
    7. Blume, Marshall E, 1971. "On the Assessment of Risk," Journal of Finance, American Finance Association, vol. 26(1), pages 1-10, March.
    8. Vasicek, Oldrich A, 1973. "A Note on Using Cross-Sectional Information in Bayesian Estimation of Security Betas," Journal of Finance, American Finance Association, vol. 28(5), pages 1233-39, December.
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