BetaStability - Some Estimation Issues on Betas: A...

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0 Some Estimation Issues on Betas: A Preliminary Investigation on the Istanbul Stock Exchange Attila Odaba ş ı Faculty of Economics and Administrative Sciences Bo ğ aziçi University, Istanbul, Turkey December 2003 Mail Address: Bogazici University, Department of Management, Bebek, 34342, Istanbul, Turkey. Phone:+90(212)358-1540, Fax: +90(212)263-7379, E-Mail: odabasi@boun.edu.tr
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2 Some Estimation Issues on Betas: A Preliminary Investigation on the Istanbul Stock Exchange Abstract This paper reports the findings of a preliminary investigation on beta stability on the Istanbul Stock Exchange for the January 1992 – December 1999. The study investigates the stability of beta across time, the effect of return interval and diversification on beta estimates with the use of a sample of 100 stocks. The beta stability is empirically inspected for individual stocks and portfolios of different sizes. The adequate beta estimation period seems to be dependent on the return interval. The analysis of portfolios implies that diversification and beta stability are positively correlated. The assessment of next-period beta becomes reliable for portfolios with ten or more stocks. Lastly, based on the actual estimates of portfolio betas, we observe that beta estimates tend to regress towards the mean. The conversion was stronger for the portfolios with extreme beta estimates. Keywords: Beta Stability, Correlation Coefficients, Return Interval, Diversification Effect.
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1 The capital asset pricing model (CAPM) developed by Sharpe (1964) and Lintner (1965) states that the relevant risk measure in holding a given security is the systematic risk, or beta, because all other risk measures can be diversified away through portfolio formation. The CAPM also assumes that the beta coefficient is constant through time. The estimation of beta is important to many applications in finance. Practioners rely on beta estimates when estimating costs of capital, applying various valuation models, and determining portfolio strategies. Researchers also rely on beta estimates for applications such as determining relative risk, testing asset pricing models, testing trading strategies, and conducting event studies. A common approach to estimating beta is to apply the standard market model estimated under the ordinary least squares (OLS) technique. Financial economists have for some time been concerned with the estimation of beta, as has been well documented. Early research focused on the stability of beta estimates across time. Blume (1971), in a pioneering effort, found that portfolio betas tend to regress toward the mean over time. Blume (1971) and Levy (1971) reported on the low correlations of OLS betas through time, concluding that the estimate of an individual firm’s beta has low predictive power for decision making in the current period. Blume (1975) studied whether estimated betas exhibit a tendency to regress towards the great mean of all betas. Some have claimed that the longer the
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This note was uploaded on 09/09/2011 for the course BUSINESS 300 taught by Professor N/a during the Spring '09 term at DeVry Chicago.

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BetaStability - Some Estimation Issues on Betas: A...

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