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Home | Events | Shrinking Beta
Seminar

Shrinking Beta


  • Location
    Erasmus University, Polak Building, Room 2-16
    Rotterdam
  • Date and time

    November 13, 2019
    12:00 - 13:15

Abstract: Betas are used in many applications ranging from asset pricing tests, cost of capital estimation, investment management and risk management. Beta needs to be estimated, and to reduce estimation error, shrinkage to its theoretical value of one is often applied. Since beta is the product of the return correlation of a security with the market and its relative return volatility to that of the market, we shrink correlation and volatility separately and evaluate its predictive power. We find economically and statistically significant gains from shrinking correlations more than volatilities, as correlations tend to be estimated with more noise.

Co-authored with David Blitz (Robeco), Dixie de Klerk (ING), Kristina Usaite (Robeco), Pim van Vliet (Robeco)