Simpler Better Market Betas

46 Pages Posted: 6 May 2019 Last revised: 19 May 2020

See all articles by Ivo Welch

Ivo Welch

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

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Date Written: May 18, 2020

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

Suggested Citation

Welch, Ivo, Simpler Better Market Betas (May 18, 2020). Available at SSRN: https://ssrn.com/abstract=3371240 or http://dx.doi.org/10.2139/ssrn.3371240

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