On the Estimation and Stability of Beta

Abstract

Beta coefficients were initially defined by Sharpe [11] as the slope term in the simple linear regression function where the rate of return on a market index was the independent variable and a security's rate of return was the dependent variable. As indicated by Brenner and Smidt [4], accurate estimation of beta coefficients is important for at least two reasons. First, they are important for understanding risk-return relationships in capital market theory. Second, they are important for use in making investment decisions. Some confusion has appeared, however, in recent research regarding both the optimal estimation interval and the intertemporal stability of beta coefficients. The purpose of this paper is to examine this confusion and present new evidence on the estimation and stability of beta.

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