Time-Stratified Estimates of Portfolio Betas and Their Effect on the Capital Asset Pricing Model

Abstract

This paper shows that large efficiency gains in estimating portfolio betas can be achieved by using time-stratified estimates which explicitly incorporate seasonality in stock returns. Several types of estimates are examined: combined, separate, two strata and twelve strata. Not only do these estimates greatly reduce standard errors, but also time-stratified beta estimates raise the intercept and lower the slope in estimates of the capital market line.

Keywords: seasonality, beta estimation, capm, stratified samples

JEL Classification: G12