Reports of beta's death are premature: evidence from the UK


Clare, A.D., Priestley, R. and Thomas, S.H. (1998) Reports of beta's death are premature: evidence from the UK. Journal of Banking & Finance, 22, (9), 1207-1229. (doi:10.1016/S0378-4266(98)00050-8).

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Description/Abstract

A number of authors have found that firm size and book-to-market-value capture the cross-sectional variation in average stock returns. More importantly, these variables have been shown to out-perform the CAPM's β coefficient in explaining the cross-section of US stock returns. However, these studies all employ variants of the two-step estimator due to Fama and MacBeth (Fama, E.F., MacBeth, J.D., 1973. Risk, return and equilibrium: Empirical tests. Journal of Political Economy 71, 607–636), which impose implicitly the restriction that idiosyncratic returns are uncorrelated. In this paper we use a one-step estimator due to McElroy et al. (McElroy, M.B., Burmeister, E., Wall, K.D., 1985. Two estimators for the APT model when factors are measured. Economics Letters 19, 271–275) and find a highly significant role for β risk in the UK stock market when we allow for correlation amongst idiosyncratic returns.

Item Type: Article
ISSNs: 0378-4266 (print)
Related URLs:
Keywords: beta, one-step estimation, expected returns
Subjects: H Social Sciences > HB Economic Theory
Divisions: University Structure - Pre August 2011 > School of Management
ePrint ID: 37367
Date Deposited: 08 Mar 2007
Last Modified: 27 Mar 2014 18:23
URI: http://eprints.soton.ac.uk/id/eprint/37367

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