Estimating Security Betas Using Prior Information Based on Firm Fundamentals
Peter C. Schotman and
Review of Financial Studies, 2016, vol. 29, issue 4, 1072-1112
We propose a hybrid approach for estimating beta that shrinks rolling window estimates toward firm-specific priors motivated by economic theory. Our method yields superior forecasts of beta that have important practical implications. First, unlike standard rolling window betas, hybrid betas carry a significant price of risk in the cross-section even after controlling for characteristics. Second, the hybrid approach offers statistically and economically significant out-of-sample benefits for investors who use factor models to construct optimal portfolios. We show that the hybrid estimator outperforms existing estimators because shrinkage toward a fundamentals-based prior is effective in reducing measurement noise in extreme beta estimates. Received May 17, 2011; accepted October 7, 2015 by Editor Geert Bekaert.
References: Add references at CitEc
Citations: View citations in EconPapers (13) Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
Working Paper: Estimating security betas using prior information based on firm fundamentals (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:oup:rfinst:v:29:y:2016:i:4:p:1072-1112.
Ordering information: This journal article can be ordered from
Access Statistics for this article
Review of Financial Studies is currently edited by Maureen O'Hara
More articles in Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press () and Christopher F. Baum ().