Stock Beta Research Articles

Waite First Securities

An account executive has the task of calculating a beta value for three stocks of interest to an important client, based on five years of monthly total returns. The client is interested in these beta values as measures of the riskiness of the three investments. This case is best used near the beginning of a module on regression. It focuses on the simple linear regression model relating equity returns to market returns. This use of regression (to calculate a stock's beta) is very common in financial analyses and will be seen by the students in other courses. The case serves to clarify the distinction between systematic and unsystematic risk and between R-squared and the standard deviation of residuals as measures of forecasting uncertainty.

Asymmetric beta in bull and bear market conditions: evidences from India

The significant role played by beta in various aspects of financial decision-making has forced people from small investors to investment bankers to rethink on beta in the era of globalization with ever changing market conditions. Standing on the edge of a free capital mobile world with technological innovations happening in no time, it is imperative to understand the stability of beta in accordance to these changes and also it would augments an efficient investment decisions with additional information on the beta. This study examined the stability of beta for India from a developing country perspective with a series of possible competing definitions of market conditions and alternative model specification. The results strongly validate Fabozzi and Francis (1977) claim of stable beta for individual stocks in all market conditions.

Beta Forecasting: A Two-Decade Evaluation

This paper compares a series of competing models to forecast beta. Realized measures of asset return covariance and variance are computed and applied to forecast beta following Andersen, Bollerslev, Diebold and Wu (2005a and 2005b). This approach is compared with the traditional constant beta model and a variant, the random walk model. It is shown that an autoregressive model with two or three lags that is estimated on the previous 80 quarters of realized beta produces the lowest or close to the lowest error for quarterly stock beta forecasts. In general, the AR(3) model has a mean-squaredforecast-error half that of the constant beta model.

Instability and predictability of factor betas of industrial stocks: The Flexible Least Squares solutions

By using the Flexible Least Squares (FLS) method, this study traces out month-to-month alterations in factor betas. The time variation paths of factor betas reveal time-varying correlations between different factor betas. Moreover, the FLS method is found to be able to produce more accurate and stable forecasts of industry costs of equity than rolling regressions and other methods, in terms of smaller forecasting errors and standard deviation of forecasting errors, thanks to the better estimates of factor betas.

Asymmetric Risk Loadings in the Cross Section of Stock Returns

Time-varying factor loadings exhibit pronounced asymmetry in the cross section of stock returns. To capture this asymmetry, we develop regime-switching versions of the CAPM and the Fama French three-factor model, allowing both factor loadings and predictable risk premiums to switch across regimes. We estimate the models jointly on the decile book-to-market portfolios, together with the market portfolio to investigate the role of asymmetric risk in the book-to-market premium. We find that betas of value stocks increase significantly during bear market episodes. However, we still reject that the book-to-market premium is equal to zero for both the regime-switching conditional CAPM and the Fama-French model, even in the presence of regimes.

Asset Pricing Models and Financial Market Anomalies

This paper derives and implements a framework in which to test whether conditional asset pricing models, applied to single securities, can explain the size, value, turnover, and momentum effects in expected stock returns. In this framework individual stock betas vary with firm level size and book-to-market as well as with macroeconomic variables. The evidence shows that under the extensively studied constant beta framework, none of the models examined capture any of the size, value, turnover, and past return effects, even when returns are risk-adjusted by size, value, liquidity, and momentum factors. In contrast, when beta is allowed to vary, the size and book to market effects are often explained, but the explanatory power of turnover and past return remains robust. The past return or momentum effect is related to model mispricing that varies with macroeconomic variables, whereas turnover shows no business cycle patterns.

ANALISIS PENGARUH NILAI SAHAM YANG BEREDAR, STRUKTUR MODAL, RISIKO PASAR, DAN SUKU BUNGA TERHAD AP RETITRN SAHAM DI BEJ DENGAN PENDEKATAN MODEL DINAMIS (Studi Kasus Pada Sektor Aneka lndustri Tahun 1996-2002)

The study aims at empirically proving and analyzing the balance model of Capital Asset Pricing Model (CAPM with the multifactor of risks, consisting of: outstanding stocks value, capital structure represented by Debt EquiQ Ratio (DER), market risk as represented by stock market beta, and the interest rate on company return on stock.This research uses a dynamic model approach considering the existence of the weaknessesin a classic linear model. Since the investment is related to investors behavior that need a lag to market change, the use of the dynamic model approach will be better. It is because the dynamic model uses autoregressive approach containing the lag. The dynamic model used here is Partial Adjustment Model (PAM) and Error Correction Model (ECM). Based on the estimation of the PAM model it is proven that the model is inefficient in finding the evidence confirming the hypothesis. Subsequently,based on the result of the examination of the ECM model it isconcluded that outstanding stocks value has a positive and signiJicant impact in short term and a negative impact in long term. It means that in the short term outstanding stocks value serves as the consideration for investors in making an investment. However in the long term they are likely to believe that the use of smaller internal capital proportion will be more beneficial for them. The capital structure has only a longierm impact on the return on stock. It means that the impact of DER on stock return on miscellaneous industry sector needs the quite long lag to influence the investors in determining stocks return. It indicates that in the long term they believ:e that the use of increasing number of loan will causes the decrease in company liquidity. Consequently, the opportunity for the company to go bankrupt is bigger Beta stock in the study has a negative impact in the long term. Theoretically, it is not consistent with the parameter direction and indicated that beta stock does notserve as an app;r,pviate prory in measuring the rislcs on. miscellaneous industry sector The interest rate has in the long term a negative impact on stocks return and needs the long lag to influence the investors in determining the return on stocks.Keywords: Stock return, outstanding stock value, DER (Debt Equity Ratio), beta, interest rote, ECM (Eruor Correction Model)

A Dynamic Asset Pricing Model with Time-Varying Idiosyncratic Risk

This paper utilizes a state-of-the-art multivariate GARCH model to account for time-variation in idiosyncratic risk in improving the performance of the single-factor CAPM, the three factor Fama-French model and the four-factor Carhart model. I show how to incorporate time-variation in the second moments of the residuals in a very general way. When applied to the Fama and French (1993) size/book-to-market portfolio returns, I document a 50% reduction in the average absolute pricing error of this dynamic Fama-French model over the static one. In addition, I find that market betas of growth stocks increase during recessions while market betas of value stocks decrease during recessions and that HML betas of value stocks increase during recessions while HML betas of growth stocks decrease during recessions. Finally, for the Fama and French industry portfolios I find that the single-factor model outperforms the three and four factor models substantially both in their unconditional and conditional forms.

Consumer Confidence and Asset Prices: Some Empirical Evidence

We explore the conditional version of the CAPM and the CCAPM using the methodology of Lettau and Ludvigson (2001). As a conditioning variable, we use the Index of Consumer Sentiment from the University of Michigan. The ability of the confidence index to explain the cross-section of the 25 Fama-French portfolios is comparable to that of the consumption-to-wealth ratio advocated by Lettau and Ludvigson, or the default spread employed by Jagannathan and Wang (1996). As suggested by further analysis, the improved cross-sectional performance is related to the fact that the conditional market betas of small stocks are significantly more sensitive to the business cycle than those of large stocks.

Comovement

Building on Vijh (Rev. Financial Stud. 7 (1994)), we use additions to the S&P 500 to distinguish two views of return comovement: the traditional view, which attributes it to comovement in news about fundamental value, and an alternative view, in which frictions or sentiment delink it from fundamentals. After inclusion, a stock's beta with the S&P goes up. In bivariate regressions which control for the return of non-S&P stocks, the increase in S&P beta is even larger. These results are generally stronger in more recent data. Our findings cannot easily be explained by the fundamentals-based view and provide new evidence in support of the alternative friction- or sentiment-based view.

Implied Equity Duration: A New Measure of Equity Risk

Duration is an important and well-established risk characteristic for fixed income securities. We use recent developments in financial statement analysis research to construct a measure of duration for equity securities. We find that the standard empirical predictions and results for fixed income securities extend to equity securities. We show that stock price volatility and stock beta are both positively correlated with equity duration. Moreover, estimates of common shocks to expected equity returns extracted using our measure of equity duration capture a strong common factor in stock returns. Additional analysis shows that the book-to-market ratio provides a crude measure of equity duration and that our more refined measure of equity duration subsumes the Fama and French (1993) book-to-market factor in stock returns. Our research shows how structured financial statement analysis can be used to construct superior measures of equity security risk.

Terrorism-induced structural shifts in financial risk: airline stocks in the aftermath of the September 11th terror attacks

This paper investigates the effects of terror attacks of September 11 on a set of airline stocks listed at various international stock markets. Utilizing the Market Model as the relevant return generating mechanism, we document a structural break in systematic risk (beta) for airline stocks. Moreover, our empirical evidence shows that, apart from the systematic risk, idiosyncratic risk has also substantially increased. In quantitative terms, conditional systematic risk has on average more than doubled, while the percentage it represents over total risk has shown a considerable increase. These results have implications for portfolio diversification and the cost (and ability) of airlines in raising capital.

Terrorism-induced structural shifts in financial risk: airline stocks in the aftermath of the September 11th terror attacks

This paper investigates the effects of terror attacks of September 11 on a set of airline stocks listed at various international stock markets. Utilizing the Market Model as the relevant return generating mechanism, we document a structural break in systematic risk (beta) for airline stocks. Moreover, our empirical evidence shows that, apart from the systematic risk, idiosyncratic risk has also substantially increased. In quantitative terms, conditional systematic risk has on average more than doubled, while the percentage it represents over total risk has shown a considerable increase. These results have implications for portfolio diversification and the cost (and ability) of airlines in raising capital.

Growth Opportunities and Assets in Place: Implications for Equity Betas

Price changes can be associated with either increases or decreases in systematic risk. Most of the existing literature focuses on the leverage effect, which suggests that betas decrease (increase) as stock prices increase (decrease). Alternatively, betas may move in the same direction as stock prices if growth opportunities have higher betas and are more volatile than assets in place. Our empirical work indicates that the latter effect dominates, even for a sub-sample of highly levered firms that presumably have relatively fewer growth opportunities. We also link variations in betas to firm characteristics that proxy for the proportion of the firm invested by growth opportunities. These growth opportunity proxies explain a large portion of cross-sectional differences in betas. Finally, we find preliminary evidence that investors may under-react to the decrease in the beta of stocks that have performed particularly poorly.

An investigation into the role of liquidity in asset pricing: Australian evidence

Employing a cross-sectional regression framework, we explore whether liquidity (as proxied by share turnover) is priced in an Australian setting, using monthly data over the period 1990 to 1999. We find that turnover is negatively related to stock returns and its importance persists even after controlling for book-to-market, size, stock beta and momentum. This finding is robust to seasonality effects and to potential nonlinearities.

The effect of an asset's market weight on its beta: implications for international markets

This paper derives the relationship between a stock's beta and its weighting in the portfolio against which its beta is calculated. Contrary to intuition the effect of this market weight is in general very substantial. We then suggest an alternative to the conventional measure of abnormal return, which requires an estimate of a firm's beta when its market weight is zero. We argue that the alternative measure is superior, and show that it can differ substantially from the conventional measure when a firm has non-trivial market weight. The difference in abnormal returns may be disaggregated into a “market return effect” and a “beta effect”.

Investing in Shares of Commercial Banks in Nepal: An Assessment of Return and Risk Elements

An attempt has been made in this paper to determine whether the shares of commercial banks in Nepal are correctly priced and to trace their future price movements when striving towards equilibrium. For this, some theoretical models have been discussed to analyze return and risk characteristics of those shares. The correlation coefficients between the returns on individual shares and the return on market portfolio have been analyzed with the objective of decomposing the total risk into systematic and unsystematic components. The analysis of the individual stock's beta coefficient helps determine the minimum rate of return required by the investor to compensate for systematic risk. Statistical results suggest that the analyzed shares here are not in equilibrium with most of the shares being less risky than the market. While all the shares examined appear to be attractive to the potential investors since they produce higher rates of return than that of the average stock, the various shares have different degrees of risk with some shares being unable to generate the minimum rate of return (i.e. the sum of risk free-rate plus a premium for additional risk bearing).

A Surprising Development: Tests of the Capital Asset Pricing Model and the Efficient Market Hypothesis in Turkey's Securities Markets

This paper performs two tests of the efficient market hypothesis in the markets for Turkish securities using GARCH-M methods. The first test is a joint test of the Efficient Market Hypothesis and a Multifactor Capital Asset Pricing Model. We wondered if a Capital Asset Pricing Model with inter-temporal variation of risks would shed any light on the reason for surprisingly low estimates of beta in the Classical Capital Asset Pricing Model for Turkey and other Emerging Markets. We also wondered whether, because of the newness and high volatility of Turkey's financial markets, we could find market inefficiencies. We find that we cannot reject the null hypothesis that the CAPM applies and Turkish securities markets are efficient. The first test analysis also provides an estimate of the cost of capital in Turkey and gives us an estimated value of the beta of Turkey's common stock with the World stock portfolio of about one. The second test develops a forecasting model for returns to a specific portfolio, long the ISE Dollar Index and short the S&P 500 composite. We sought once again evidence of market inefficiency by asking whether returns to this portfolio were greater than or were commensurate with its systematic risks. We find that simply buying and holding the portfolio produced a low ratio of return to risk, suggesting that the portfolio is not on the efficient frontier of the Capital Market line. But we found that an active trading rule generates very high returns. Normally this is evidence of weak form inefficiency. But because portfolio risks also vary over time we still cannot reject the efficient market hypothesis. A surprising development.

Effects of legislation events on US gaming stock returns and market turnings

The deregulation of casino gaming has becomea new trend across the US since the beginning of this decade; but from the mid 1990s on, the voice of tightened regulation is lifted up by the public, while the “cyber-casino” (online gambling) business is also developing its own customer base. This study examines various federal and state legislation events regarding casino gaming regulation and deregulation, and finds that the announcement effects on stock portfolio returns vary across different types of gaming companies. On average, gaming equipment suppliers and small casino operators are found to react to legislation events more significantly, compared with those large casino firms. Furthermore, since the casino gaming business is believed to be highly sensitive to the economic upturns and downturns, this paper also investigates the impacts on the risk-adjusted return (alpha) and the systematic risk (beta) of gaming stocks across ”bull” (up) and “bear”(down) market situations. The results indicate that between July 1993 and December 1997, gaming stocks on average yield a significantly lower return and a significantly greater systematic risk against the US stock market. After changes in stock market conditions are controlled, the systematic risk is still considerably above the market average, but the excess return turns out insignificant.

An Empirical Investigation of the Cross‐Industry Variation in Mean Reversion of Australian Stock Betas

In this paper we empirically investigate the tendency for beta risk to mean‐revert across industries. Using a sample of Australian stocks over the ten‐year period 1989 to 1998, our key results are as follows. We generally observe evidence of a mean reversion tendency — in particular, this seems most appropriate for the Gold, Energy, Finance and Consumer industry groupings. Moreover, there is some evidence that the mean reversion of beta is different across industries. Furthermore, we see that the maximum mean reversion beta occurs for the Gold industry — a value of approximately 1.4 (1.6) for the OLS (Scholes‐Williams) beta analysis. On the other hand, the minimum mean reversion beta based on the ‘All Stocks’ OLS analysis occurs for Miscellaneous Industries with a value of 0.4, while a similar minimum mean reversion beta based on the Scholes‐Williams analysis occurs for the Consumer industry grouping.