In Search of Beta

42 Pages Posted: 23 Apr 2015 Last revised: 18 Mar 2016

Alan Gregory

University of Exeter - Xfi Centre; University of Exeter Business School

Shan Hua

University of Exeter Business School - XFI Centre for Finance and Investment

Rajesh Tharyan

University of Exeter; University of Exeter Business School

Date Written: March 10, 2016

Abstract

Despite the arguments that can be made against using the CAPM, it is very widely used in regulation. In particular, it is relied upon in setting utility prices in each of Australia, New Zealand and the United Kingdom, and also features in this context in Germany. In addition, UK competition authorities make use the CAPM to assess profitability in the case of “market investigations”. All of these applications require beta as an input into the CAPM, but the beta estimates employed typically vary depending on frequency of the returns data used in their estimation. Given the implication of returns frequency for estimates of beta noted in the literature, and in particular the role of firm characteristics in this, this study undertakes a detailed examination of the evidence for the UK and shows that longer frequency betas have superior characteristics to high frequency betas. We find that differences in beta can be explained by opacity, size, liquidity and book-to-market factors. Our conclusions are unequivocal and have important policy implications for regulatory use of the CAPM, as they imply that low frequency beta estimates should always be preferred to high frequency beta estimates. They also have important implications for academic researchers using the market model in empirical investigations.

Keywords: CAPM, regulatory finance, beta

JEL Classification: G12, G13, G15, L91-L97

Suggested Citation

Gregory, Alan and Hua, Shan and Tharyan, Rajesh, In Search of Beta (March 10, 2016). Available at SSRN: https://ssrn.com/abstract=2597467 or http://dx.doi.org/10.2139/ssrn.2597467

Alan Gregory (Contact Author)

University of Exeter - Xfi Centre ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 3BZ
United Kingdom

University of Exeter Business School ( email )

Streatham Court
Xfi Building Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Shan Hua

University of Exeter Business School - XFI Centre for Finance and Investment ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 3BZ
United Kingdom

Rajesh Tharyan

University of Exeter ( email )

Northcote House
The Queen's Drive
Exeter, Devon EX4 4QJ
United Kingdom

University of Exeter Business School ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 4ST
United Kingdom
01392262544 (Phone)

HOME PAGE: http://business-school.exeter.ac.uk/about/whoswho/index.php?web_id=Rajesh_Tharyan

Register to save articles to
your library

Register

Paper statistics

Downloads
133
rank
200,796
Abstract Views
995
PlumX