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Simply Better Market Betas

Ivo Welch

Critical Finance Review, 2022, vol. 11, issue 1, 37-64

Abstract: This paper introduces a robust and easy-to-implement one-pass market-beta estimator. It only requires first winsorizing daily stock rates of return at −2 and +4 times the contemporaneous market rate of return. In predicting future market-betas, this “slope-winsorized†beta estimator predicts future betas better not only than OLS betas, Bloomberg betas (ubiquitous on financial websites), and Vasicek (1973) betas, but also published estimators that require intra-day data, super-computers, or financial statements. Moreover, using weighted-least squares to exponentially decay the weight of aged return observations (with a half-life of about four months) further improves the estimates.

Keywords: Market beta; Factor exposures; Robust estimation (search for similar items in EconPapers)
JEL-codes: C58 G11 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Simpler Better Market Betas (2019) Downloads
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