On the instability of betas: The case of Spain
AbstractIt is a big mistake to use betas calculated from historical data to compute the required return to equity. It is a mistake for seven reasons: because betas calculated from historical data change considerably from one day to the next; because calculated betas depend very much on which stock index is used as the market reference; because calculated betas depend very much on which historical period is used to calculate them; because calculated betas depend on what returns (monthly, daily,…) are used to calculate them; because very often we do not know if the beta of one company is lower or higher than the beta of another; because calculated betas have little correlation with stock returns; and because the correlation coefficients of the regressions used to calculate the betas are very small. For these seven reasons we can say either that the beta calculated from historical data is not a good approximation to the company's beta, or that the CAPM does not work (the required return is affected by other factors, besides the covariance of the company's return with the market return, the risk-free rate and the market risk premium), or both things at once.
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Bibliographic InfoPaper provided by IESE Business School in its series IESE Research Papers with number D/548.
Length: 23 pages
Date of creation: 16 Mar 2004
Date of revision:
beta; beta-ranked portfolios; historical beta; expected beta;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-04 (All new papers)
- NEP-CFN-2004-04-04 (Corporate Finance)
- NEP-FIN-2004-04-04 (Finance)
- NEP-FMK-2004-04-04 (Financial Markets)
- NEP-RMG-2004-04-04 (Risk Management)
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