Investment volatility: A critique of standard beta estimation and a simple way forward

DOI10.1016/J.EJOR.2006.09.018zbMATH Open1137.91475arXiv1109.4422OpenAlexW3122432926WikidataQ56443990 ScholiaQ56443990MaRDI QIDQ2467287FDOQ2467287

Authors: Chris Tofallis 

Publication date: 21 January 2008

Published in: European Journal of Operational Research (Search for Journal in Brave)

Abstract: Beta is a widely used quantity in investment analysis. We review the common interpretations that are applied to beta in finance and show that the standard method of estimation - least squares regression - is inconsistent with these interpretations. We present the case for an alternative beta estimator which is more appropriate, as well as being easier to understand and to calculate. Unlike regression, the line fit we propose treats both variables in the same way. Remarkably, it provides a slope that is precisely the ratio of the volatility of the investment's rate of return to the volatility of the market index rate of return (or the equivalent excess rates of returns). Hence, this line fitting method gives an alternative beta, which corresponds exactly to the relative volatility of an investment - which is one of the usual interpretations attached to beta.

Full work available at URL: https://arxiv.org/abs/1109.4422

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zbMATH Keywords

volatilityinvestment analysissystematic riskbeta

Mathematics Subject Classification ID

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Cited In (6)

• Volatility forecasting of financial time series using wavelet based exponential generalized autoregressive conditional heteroscedasticity model
• Alternative to beta coefficients in the context of diffusions
• Robust prediction of beta
• Estimating the Stock/Portfolio Volatility and the Volatility of Volatility: A New Simple Method
• Alternative beta estimation for the market model using partially adaptive techniques
• Sub-additive recursive ``matching noise and biases in risk-weighted index calculation methods in incomplete markets with partially observable multi-attribute preferences

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