Simpler Better Market Betas
Ivo Welch ()
No 26105, NBER Working Papers from National Bureau of Economic Research, Inc
This paper proposes a robust one-pass estimator that is easy to code: Justified by the market-model itself and using a prior that market-betas should not be less than –2 and more than +4, the market-model is run on daily stock rates of return that have first been winsorized at –2 and +4 times the contemporaneous market rate of return. The resulting “slope-winsorized” estimates outperform (all) other known estimators in predicting the future OLS market-beta (on R² metrics). Adding reasonable age decay, suggesting a half-life of about 3 to 5 months, to observations entering the market-model further improves it. The estimates outpredict the Vasicek estimates by about half as much as the Vasicek estimates outpredict the OLS estimates.
JEL-codes: G10 G11 G31 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:26105
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