Shrinking Beta

24 Pages Posted: 23 Feb 2022

See all articles by David Blitz

David Blitz

Robeco Quantitative Investments

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Quantitative Investments

Kristina Ūsaitė

Robeco Asset Management

Pim van Vliet

Robeco Quantitative Investments

Date Written: February 10, 2022

Abstract

Betas are used in many applications ranging from asset pricing tests, cost of capital estimation, investment management and risk management. Beta needs to be estimated, and to reduce estimation error, shrinkage to its cross-sectional average value of one is often applied. Since beta is the product of the return correlation of a security with the market and its relative return volatility to that of the market, we shrink correlation and volatility separately and evaluate its predictive power. We find economically and statistically significant gains from shrinking correlations more than volatilities.

Keywords: Beta, Correlation, Investing, Low-risk, Shrinkage, Volatility

JEL Classification: C01, C13, C58, G11, G17

Suggested Citation

Blitz, David and Swinkels, Laurens and Ūsaitė, Kristina and van Vliet, Pim, Shrinking Beta (February 10, 2022). Available at SSRN: https://ssrn.com/abstract=4031825 or http://dx.doi.org/10.2139/ssrn.4031825

David Blitz

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Laurens Swinkels (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Quantitative Investments ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

Kristina Ūsaitė

Robeco Asset Management

Rotterdam, 3014 DA
Netherlands

HOME PAGE: http://www.robeco.com/en/

Pim Van Vliet

Robeco Quantitative Investments ( email )

Rotterdam, 3011 AG
Netherlands

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