Estimating Betas and Stock-Return Correlations From Monthly Data: A Warning Note
AbstractThe 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 04/557.
Length: 36 pages
Date of creation: Jan 2004
Date of revision:
betas; international correlations; estimation risk;
Find related papers by JEL classification:
- G1 - Financial Economics - - General Financial Markets
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-08 (All new papers)
- NEP-ETS-2004-02-08 (Econometric Time Series)
- NEP-FMK-2004-02-08 (Financial Markets)
- NEP-RMG-2004-02-08 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(2), pages 197-226, June.
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 56(2), pages 649-676, 04.
- ROCKINGER, Michael & JONDEAU, Eric, 2001.
"Testing for differences in the tails of stock-market returns,"
Les Cahiers de Recherche, HEC Paris
739, HEC Paris.
- Jondeau, Eric & Rockinger, Michael, 2003. "Testing for differences in the tails of stock-market returns," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(5), pages 559-581, December.
- Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
- 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, Cambridge University Press, vol. 6(05), pages 1251-1262, December.
- Vasicek, Oldrich A, 1973. "A Note on Using Cross-Sectional Information in Bayesian Estimation of Security Betas," Journal of Finance, American Finance Association, American Finance Association, vol. 28(5), pages 1233-39, December.
- 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,
Society for Financial Studies, vol. 16(3), pages 717-763, July.
- Blume, Marshall E, 1971. "On the Assessment of Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 26(1), pages 1-10, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jonathan Temple).
If references are entirely missing, you can add them using this form.