Title

Reexamination of estimating beta coefficient as a risk measure in CAPM

Abstract

This research examines the alternative ways of estimating the coefficient of non-diversifiable risk, namely beta coefficient, in Capital Asset Pricing Model (CAPM) introduced by Sharpe (1964) that is an essential element of assessing the value of diverse assets. The nonparametric methods used in this research are the robust Least Trimmed Square (LTS) and Maximum likelihood type of M-estimator (MMestimator). The Jackknife, the resampling technique, is also employed to validate the results. According to finance literature and common practices, these coefficients have often been estimated using Ordinary Least Square (LS) regression method and monthly return data set. The empirical results of this research pointed out that the robust Least Trimmed Square (LTS) and Maximum likelihood type of M-estimator (MM-estimator) performed much better than Ordinary Least Square (LS) in terms of efficiency for large-cap stocks trading actively in the United States markets. Interestingly, the empirical results also showed that daily return data would give more accurate estimation than monthly return data in both Ordinary Least Square (LS) and robust Least Trimmed Square (LTS) and Maximum likelihood type of Mestimator (MM-estimator) regressions.

Department(s)

Finance and General Business
Mathematics

Document Type

Article

DOI

https://doi.org/10.13106/jafeb.2018.vol5.no1.11

Keywords

And capital market theory, Capital asset pricing model, Ordinary least square regression, Robust regression

Publication Date

2-1-2018

Journal Title

Journal of Asian Finance, Economics and Business

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