On the Use of Beta in Regulatory Proceedings: An Empirical Examination

Richard H. Pettway

Bell Journal of Economics, 1978, vol. 9, issue 1, 239-248

Abstract: Since the development of the capital asset pricing model and the articles of Myers (1972) and Breen-Lerner (1972), the use of the CAPM to measure the required rate of return of equity investors and thereby to determine the allowed rate of return for a utility has become more common. Although the CAPM does not require structural stability of its parameters measured from historical observations, reasonable stability is presumed. Otherwise the model is not operationally useful. The purposes of this paper are to explore the structural stability of the estimating process and to assess whether the CAPM is operational in actual regulatory proceedings.

Date: 1978
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