Simpler Better Market Betas

57 Pages Posted: 6 May 2019 Last revised: 18 Aug 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: August 16, 2020

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

Suggested Citation

Welch, Ivo, Simpler Better Market Betas (August 16, 2020). Available at SSRN: https://ssrn.com/abstract=3371240 or http://dx.doi.org/10.2139/ssrn.3371240

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