36 Pages Posted: 15 Jul 2016 Last revised: 18 Aug 2016
Date Written: July 12, 2016
Systematic (CAPM beta) risk forecasting for long horizons, such as one year, play an important role in financial management. This paper evaluates a variety of beta forecasting procedures for long forecast horizons. The widely utilized Fama-MacBeth approach based on five years of monthly returns is found to be unreliable in terms of mean absolute (and squared) forecast error and statistical bias. The most accurate forecasts are found to be generated from an autoregressive model of realized beta. In addition to analyzing the statistical properties of these forecasts, the economic significance between the different approaches is demonstrated through evaluating investment projects.
Keywords: NPV Analysis, Realized Beta, Systematic Risk
JEL Classification: G17
Suggested Citation: Suggested Citation
Cenesizoglu, Tolga and de Oliveira Ferrazoli Ribeiro, Fabio and Reeves, Jonathan J., Beta Forecasting at Long Horizons (July 12, 2016). UNSW Business School Research Paper No. 2016 BFIN 01. Available at SSRN: https://ssrn.com/abstract=2808969 or http://dx.doi.org/10.2139/ssrn.2808969
By David Blitz