Monthly Beta Forecasting with Low, Medium and High Frequency Stock Returns

31 Pages Posted: 6 Sep 2013 Last revised: 27 Aug 2014

See all articles by Tolga Cenesizoglu

Tolga Cenesizoglu

HEC Montreal - Department of Finance

Qianqiu Liu

University of Hawaii at Manoa - Shidler College of Business

Jonathan J. Reeves

UNSW Business School, University of New South Wales; Financial Research Network (FIRN)

Haifeng Wu

UNSW Australia Business School, School of Banking and Finance; UNSW Business School

Date Written: July 2014

Abstract

Generating one-month-ahead systematic (beta) risk forecasts is common place in financial management. This paper evaluates the accuracy of these beta forecasts in three return measurement settings; monthly, daily and 30 minutes. It is found that the popular Fama-MacBeth beta from 5 years of monthly returns generates the most accurate beta forecast among estimators based on monthly returns. A realized beta estimator from daily returns over the prior year, generates the most accurate beta forecast among estimators based on daily returns. A realized beta estimator from 30 minute returns over the prior 2 months, generates the most accurate beta forecast among estimators based on 30 minute returns. In environments where low, medium and high frequency returns are accurately available, beta forecasting with low frequency returns are the least accurate and beta forecasting with high frequency returns are the most accurate. The improvements in precision of the beta forecasts are demonstrated in portfolio optimization for a targeted beta exposure.

Keywords: CAPM, portfolio optimization, systematic risk, time-series modeling

JEL Classification: C53, G17

Suggested Citation

Cenesizoglu, Tolga and Liu, Qianqiu and Reeves, Jonathan J. and Wu, Haifeng, Monthly Beta Forecasting with Low, Medium and High Frequency Stock Returns (July 2014). UNSW Australian School of Business Research Paper No. 2013 BFIN 07; FIRN Research Paper. Available at SSRN: https://ssrn.com/abstract=2321522 or http://dx.doi.org/10.2139/ssrn.2321522

Tolga Cenesizoglu

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

HOME PAGE: http://www.hec.ca/en/profs/tolga.cenesizoglu.html

Qianqiu Liu

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way, E602f
Honolulu, HI 96822
United States
808-956-8736 (Phone)
808-956-9887 (Fax)

Jonathan J. Reeves (Contact Author)

UNSW Business School, University of New South Wales ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN) ( email )

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

Haifeng Wu

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
+61 2 9385 5874 (Phone)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

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