Portfolio Formation, Measurement Errors and Beta Shifts: A Random Sampling Approach

Posted: 24 Nov 1999

See all articles by Bing Liang

Bing Liang

University of Massachusetts Amherst - Department of Finance

Abstract

This paper demonstrates that portfolio approach could suffer a serious problem when the sorting variables contain not only true values but also measurement errors. The grouped measurement errors will be embedded into the data used to test financial models and further bias the testing results. To correct for this measurement error problem, I develop a random sampling approach to form portfolios. Results from this new methodology are unbiased and robust. By applying this methodology to investigate beta shifts, I show that the previous results about beta shifts are driven by measurement errors. The actual beta shift pattern is more complicated than that predicted by the previous studies. The risk shift hypothesis is unlikely to explain the mean reversion puzzle for stock returns.

JEL Classification: G11

Suggested Citation

Liang, Bing, Portfolio Formation, Measurement Errors and Beta Shifts: A Random Sampling Approach. The Journal of Financial Research. Available at SSRN: https://ssrn.com/abstract=187429

Bing Liang (Contact Author)

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States

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