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

Author

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  • Daniella Acker
  • Nigel W. Duck

    ()

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.

Suggested Citation

  • Daniella Acker & Nigel W. Duck, 2004. "Estimating Betas and Stock-Return Correlations From Monthly Data: A Warning Note," Bristol Economics Discussion Papers 04/557, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:uobdis:04/557
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    File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp04557.pdf
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    References listed on IDEAS

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    1. 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 1233-1239, December.
    2. Jondeau, Eric & Rockinger, Michael, 2003. "Testing for differences in the tails of stock-market returns," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 559-581, December.
    3. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    4. 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.
    5. 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.
    6. 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.
    7. Blume, Marshall E, 1971. "On the Assessment of Risk," Journal of Finance, American Finance Association, vol. 26(1), pages 1-10, March.
    8. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    betas; international correlations; estimation risk;

    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

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