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Abstract
The debate about whether beta is dead or alive has heated up once again. We believe the empirical work supporting either side of the argument is limited because market frictions are not adequately addressed. This study clarifies the controversy about the issue by creating a new moving‐average beta and analyzing two market anomalies: the turn‐of‐the‐year and the Monday effects. What is discovered in this research is (1) that a fundamental source of the problem underlying the two types of market anomalies is the persistence of market frictions that retard the arbitrage process; (2) that beta is seriously ill if the effects of market frictions are ignored; and (3) that beta is alive and well if the effects of market frictions are accommodated. Also, we show, by using an optimal lead/lag structure, the moving‐average beta provides significantly higher explanatory power for the turn‐of the‐year and the Monday effects than betas created from ordinary least squares regression and Scholes‐Williams and Fama‐French methods because the moving‐average beta accommodates the effects of market frictions into the body of beta itself. This new type of beta, a moving‐average beta, is demonstrated to be robust.
Published Version
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