Estimating the beta-return relationship by considering the sign and the magnitude of daily returns
We test the beta-return relationship under the working assumption that beta is realized under constrained but innovative trading environments. Specifically, we estimate a residual beta risk as the difference between a probability-weighted realized beta and an ordinary least squares (OLS) beta, and t...
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| Format: | article |
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2017
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| Online Access: | http://hdl.handle.net/10725/5928 https://doi.org/10.1016/j.qref.2017.04.010 http://libraries.lau.edu.lb/research/laur/terms-of-use/articles.php http://www.sciencedirect.com/science/article/pii/S1062976917301485 |
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| Summary: | We test the beta-return relationship under the working assumption that beta is realized under constrained but innovative trading environments. Specifically, we estimate a residual beta risk as the difference between a probability-weighted realized beta and an ordinary least squares (OLS) beta, and test the beta-return relationship using daily returns on the U.S. stock market factor and 30 U.S. industries. Our estimates of the market risk premium using the cross-sectional regression (CSR) of Fama and MacBeth (1973) over a period spanning from 1926/07 to 2014/12 are in line with the central prediction of the capital asset pricing model (CAPM) that the realized return is linearly related to beta. |
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