Simpler Better Market Betas

Abstract

My paper proposes a robust and easy-to-implement one-pass beta estimator: Justified by the market-model itself, daily stock returns are first winsorized at –2 and +4 times the contemporaneous market return. The resulting “slope- winsorized” betas outpredict all other prominent estimators, including not only the Bloomberg-Merrill Lynch (Blume (1971)) beta (nearly ubiquitous on all financial websites) and the better Vasicek (1973) estimator, but also estimators that require intra-day data, super-computers, and financial statements. Adding simple age decay further improves the estimates.

Keywords: market-beta, robust estimation, winsorization

JEL Classification: G11, C58