Dynamic asset beta measurement

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Abstract:

The recent advent of high-frequency data and advances in financial econometrics allow market participants to evaluate the accuracy of different beta (systematic risk) measurements. Benchmarking against the monthly realized beta formed by 30-minute data, we compare the popular Fama–MacBeth betas, the monthly realized betas formed by daily returns and our Hodrick–Prescott filtered betas, with the smoothing parameter, λ, set to 100. We find our filtered betas reduce the measurement error substantially relative to other beta measures. These results enable market participants to measure betas with greater precision and efficiency even with only daily returns in hand.

Keywords: C13; CAPM beta; G10; realized beta; systematic risk; time-varying risk

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/09603107.2012.674203

Affiliations: 1: School of Economics and Finance, Victoria University of Wellington, New Zealand 2: School of Banking and Finance,Australian School of Business, University of New South Wales, Sydney,NSW 2052, Australia

Publication date: October 1, 2012

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