Sinha, Pankaj and Jayaraman, Prabha (2012): Empirical analysis of the forecast error impact of classical and bayesian beta adjustment techniques.
Download (176kB) | Preview
The paper presents a comparative study of conventional beta adjustment techniques and suggests an improved Bayesian model for beta forecasting. The seminal papers of Blume (1971) and Levy (1971) suggested that for both single security and portfolio there was a tendency for relatively high and low beta coefficients to over predict and under predict, respectively, the corresponding betas for the subsequent time period. We utilize this proven fact to give a Bayesian adjustment technique under a bilinear loss function where the problem of overestimation and underestimation of future betas is rectified to an extent so as to give us improved beta forecasts. The accuracy and efficiency of our methodology with respect to existing procedures is shown by computing the mean square forecast error.
|Item Type:||MPRA Paper|
|Original Title:||Empirical analysis of the forecast error impact of classical and bayesian beta adjustment techniques|
|English Title:||Empirical Analysis of the Forecast Error Impact of Classical and Bayesian Beta Adjustment Techniques|
|Keywords:||Bayesian Beta adjustment technique, bi-linear loss function, portfolio risk measure|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General
|Depositing User:||Pankaj Sinha|
|Date Deposited:||26. Mar 2012 15:43|
|Last Modified:||08. Sep 2015 18:05|
Bera, A.K. and Kannan, S. (1986). An Adjustment Procedure for Predicting Systematic Risk. Journal of Applied Econometrics, 1(4), 317-332.
Blume, M.E. (1971). On the Assessment of Risk. Journal of Finance, 26(1), 1-10.
Eubank, A.A. Jr. and Zumwalt, J.K. (1979). An Analysis of the Forecast Error Impact of Alternative Beta Adjustment Techniques and Risk Classes. Journal of Finance, 34(3), 761-776. Harrington, D.R. (1983). Whose Beta is Best. Financial Analysts Journal, 39(4), 67-73.
Klemkosky, R.C. and Martin, J.D. (1975). The adjustment of Beta Forecasts. Journal of Finance, 30(4), 1123-1128.
Levy, R.A. (1971). On the Short Term Stationarity of Beta Coefficients. Financial Analysts Journal, 27(6), 55-62.
Mincer, J. and Zarnowitz, V. (1969). The Evaluation of Economic Forecasts in Jacob Mincer, ed., Economic Forecasts and Expectations, National Bureau of Economic Research.
Vasicek, O.A. (1973). A Note on using Cross-Sectional information in Bayesian Estimation of Security Betas. Journal of Finance, 28(4), 1233-1239.