Estimating Beta: Forecast Adjustments and the Impact of Stock Characteristics for a Broad Cross-Section

76 Pages Posted: 14 Nov 2017 Last revised: 21 Mar 2019

See all articles by Fabian Hollstein

Fabian Hollstein

Leibniz Universität Hannover - Faculty of Economics and Management

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Chardin Wese Simen

University of Liverpool Management School

Date Written: August 17, 2018

Abstract

Researchers and practitioners face many choices when estimating an asset's sensitivities toward risk factors, i.e., betas. Using the entire U.S. stock universe and a sample period of more than 50 years, we find that a historical estimator based on daily return data with an exponential weighting scheme as well as a shrinkage toward the industry average yield the best predictions for future beta. Adjustments for asynchronous trading, macroeconomic conditions, or regression-based combinations, on the other hand, typically yield very high prediction errors. Finally, we document a robust link between stock characteristics and beta predictability.

Keywords: Beta Estimation, Forecast Combinations, Forecast Adjustments

JEL Classification: G12, G11, G17

Suggested Citation

Hollstein, Fabian and Prokopczuk, Marcel and Wese Simen, Chardin, Estimating Beta: Forecast Adjustments and the Impact of Stock Characteristics for a Broad Cross-Section (August 17, 2018). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3069518 or http://dx.doi.org/10.2139/ssrn.3069518

Fabian Hollstein (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Chardin Wese Simen

University of Liverpool Management School ( email )

Management School
University of Liverpool
Liverpool, L69 7ZH
United Kingdom

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