Simpler Better Market Betas

Abstract

This paper proposes a robust one-pass market-beta estimator that is easy to implement: Justified by the market-model itself and using a prior that market- betas should not be too extreme, the market-model is run on daily stock rates of return that have first been winsorized at –2 and +4 times the contemporaneous market rate of return. Adding reasonable age decay (suggesting a half-life of about 3 to 5 months) in the market-model further improves the beta estimates. The resulting “slope-winsorized” (aged) beta estimators seem to outperform all other prominent estimators in predicting the future OLS market-beta, including not only the Vasicek (1973) and Dimson (1979) estimators (and even for the most illiquid stocks), but also estimators that require intra-day data, super- computer based intensive calculations, and financial statement information

Keywords: market-beta, robust estimation, winsorization

JEL Classification: G11, C58