On the Assessment of Beta Before World War I: Case Study of Brussels Stock Exchange (BSE)
34 Pages Posted: 29 Jul 2012 Last revised: 31 Jul 2012
Date Written: April 9, 2009
This paper uses completely new data to study the variations in beta when it deviates from the constancy assumption presumed by the market model. The concentration of the various researches on beta based on post 1926 data makes the 19th century Brussels Stock Exchange (BSE) data a very good out-sample dataset to test beta variations. Various models proposed in the literature to capture the variations in beta were studied. Blume’s correlation techniques reveal that beta is not stable at the individual stocks level and that the stability can be improved by portfolio formation. Using root mean square error (RMSE) criterion, it was shown that the market model betas are weak in predicting future betas. The predictability can be improved by adjusting betas with the Blume and Vasicek mean reversion techniques. Further results from this study reveal that few stocks have lead or lag relationship with the market index. Small sized stocks were detected to be more prone to outliers.
Keywords: Historical Beta Estimation, Brussels Stock Exchange
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation