Simply Better Market Betas

38 Pages Posted: 6 May 2019 Last revised: 22 Jun 2021

See all articles by Ivo Welch

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: june 13, 2021

Abstract

This paper introduces a robust and easy-to-implement one-pass market- beta estimator. It only requires first winsorizing daily stock rates of return at –2 and +4 times the contemporaneous market rate of return. In predicting future market-betas, this “slope-winsorized” beta estimator predicts future betas better not only than OLS betas, Bloomberg betas (ubiquitous on finan- cial websites), and Vasicek (1973) betas, but also published estimators that require intra-day data, super-computers, or financial statements. Moreover, using WLS to exponentially decay the weight of aged return observations (with a half-life of about four months) further improves the estimates.

Keywords: market-beta, robust estimation, winsorization

JEL Classification: G11, C58

Suggested Citation

Welch, Ivo, Simply Better Market Betas (june 13, 2021). Available at SSRN: https://ssrn.com/abstract=3371240 or http://dx.doi.org/10.2139/ssrn.3371240

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