The Memory of Beta
58 Pages Posted: 1 Jan 2020
Date Written: November 25, 2019
Researchers and practitioners employ a variety of time-series processes to forecast betas, using either short-memory models or implicitly imposing infinite memory. We find that both approaches are inadequate: beta factors show consistent long-memory properties. For the vast majority of stocks, we reject both the short-memory and difference-stationary (random walk) alternatives. A pure long-memory model reliably provides superior beta forecasts compared to all alternatives. Finally, we document the relation of firm characteristics with the forecast error differentials that result from inadequately imposing short-memory or random walk instead of long-memory processes.
Keywords: Long memory, beta, persistence, forecasting, predictability
JEL Classification: G12, C58, G11
Suggested Citation: Suggested Citation