Bias, Stability and Predictive Ability in the Measurement of Systematic Risk

Accounting Research Journal, 2009, 22 (3), 220 – 236.

19 Pages Posted: 10 Jul 2008 Last revised: 13 Mar 2013

See all articles by Stephen Gray

Stephen Gray

University of Queensland - Business School; Duke University - Fuqua School of Business; Financial Research Network (FIRN)

Jason Hall

University of Michigan, Stephen M. Ross School of Business

Drew Klease

Queensland Investment Corporation

Alan McCrystal

University of Queensland - Business School

Date Written: May 11, 2009

Abstract

Estimates of systematic risk or beta are an important determinant of the cost of capital. The standard technique used to compile beta estimates is an ordinary least squares regression of stock returns on market returns using 4 - 5 years of monthly data. This convention assumes that a longer time series of data will not adequately capture risks associated with existing assets. We show that the ability of beta estimates to predict future stock returns systematically increases with the length of the estimation window, the implication being that all available returns data should be used in beta estimation. In addition, for all estimation periods, there is an increase in returns predictability when the Vasicek adjustment is applied, an easily-implementable technique which reduces the weight placed on imprecise beta estimates.

Keywords: Beta, systematic risk, Capital Asset Pricing Model

JEL Classification: G11, G12

Suggested Citation

Gray, Stephen and Hall, Jason L. and Klease, Drew and McCrystal, Alan, Bias, Stability and Predictive Ability in the Measurement of Systematic Risk (May 11, 2009). Accounting Research Journal, 2009, 22 (3), 220 – 236.. Available at SSRN: https://ssrn.com/abstract=1157667

Stephen Gray

University of Queensland - Business School ( email )

University of Queensland
Brisbane, Queensland 4072
Australia

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Jason L. Hall (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street, Ross School of Business
University of Michigan
ANN ARBOR, MI MI 48104
United States
+1 734 926 6989 (Phone)

Drew Klease

Queensland Investment Corporation ( email )

Australia

Alan McCrystal

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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