Clare, A.D., Priestley, R. and Thomas, S.H.
Reports of beta's death are premature: evidence from the UK.
Journal of Banking & Finance, 22, (9), . (doi:10.1016/S0378-4266(98)00050-8).
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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 ? 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 ? risk in the UK stock market when we allow for correlation amongst idiosyncratic returns.
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