Heteroscedasticity and Interval Effects in Estimating Beta: UK Evidence

39 Pages Posted: 6 Mar 2008 Last revised: 4 Oct 2014

See all articles by Seth Armitage

Seth Armitage

University of Edinburgh - Accounting and Finance

Janusz Brzeszczynski

Newcastle Business School (NBS), Northumbria University, Newcastle upon Tyne, United Kingdom

Date Written: April 8, 2011

Abstract

The paper compares beta estimates obtained from OLS regression with estimates corrected for heteroscedasticity of the error term using ARCH models, for 145 UK shares. The differences are mainly less than 0.10, for betas calculated using daily returns, but even such small differences can matter in practice. OLS tends to overestimate the beta coefficients compared with ARCH models, and selecting an ARCH-type estimate makes most difference for large-cap shares. Regarding the measurement interval, the downward bias in betas from daily returns is associated not only with thin trading but also with the volatility of the share’s daily returns. We infer that the idiosyncratic component in daily returns, as well as lack of trading, is responsible for low daily betas.

Keywords: beta estimation, heteroscedasticity, ARCH models, thin trading, interval effects

JEL Classification: G15, C51

Suggested Citation

Armitage, Seth and Brzeszczynski, Janusz, Heteroscedasticity and Interval Effects in Estimating Beta: UK Evidence (April 8, 2011). Applied Financial Economics 21, 2011, pp. 1525-38, Available at SSRN: https://ssrn.com/abstract=1100573 or http://dx.doi.org/10.2139/ssrn.1100573

Seth Armitage

University of Edinburgh - Accounting and Finance ( email )

29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom
44 131 650 3794 (Phone)

Janusz Brzeszczynski (Contact Author)

Newcastle Business School (NBS), Northumbria University, Newcastle upon Tyne, United Kingdom ( email )

Department of Accounting and Financial Management
City Campus East
Newcastle upon Tyne, NE1 8ST
United Kingdom

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