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Simply Better Market Betas

Author

Listed:
  • 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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    Cited by:

    1. Jan Sila & Michael Mark & Ladislav Kristoufek & Thomas A. Weber, 2025. "Crypto market betas: the limits of predictability and hedging," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 11(1), pages 1-28, December.
    2. Baba-Yara, Fahiz & Boons, Martijn & Tamoni, Andrea, 2024. "Persistent and transitory components of firm characteristics: Implications for asset pricing," Journal of Financial Economics, Elsevier, vol. 154(C).
    3. Xu, Xia, 2025. "Market neutrality and beta crashes," Journal of Empirical Finance, Elsevier, vol. 80(C).
    4. Hollstein, Fabian & Prokopczuk, Marcel, 2022. "Testing Factor Models in the Cross-Section," Journal of Banking & Finance, Elsevier, vol. 145(C).
    5. Miguel C. Herculano, 2024. "Betting Against (Bad) Beta," Papers 2409.00416, arXiv.org.
    6. Barroso, Pedro & Detzel, Andrew & Maio, Paulo, 2025. "The volatility puzzle of the beta anomaly," Journal of Financial Economics, Elsevier, vol. 165(C).
    7. Roy, Suvra & Marshall, Ben R. & Nguyen, Hung T. & Visaltanachoti, Nuttawat, 2025. "Stock price crashes and systematic risk," Journal of Contemporary Accounting and Economics, Elsevier, vol. 21(3).
    8. 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.
    9. Novy-Marx, Robert & Velikov, Mihail, 2022. "Betting against betting against beta," Journal of Financial Economics, Elsevier, vol. 143(1), pages 80-106.
    10. Baoqing Gan, 2020. "Does Social Media Sentiment Trump News?," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5-2020, January-A.
    11. 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).
    12. 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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    Keywords

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    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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