Simply Better Market Betas

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