Heteroscedasticity and interval effects in estimating beta: UK evidence

S. Armitage, J. Brzeszczynski

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

The article compares beta estimates obtained from Ordinary Least Squares (OLS) regression with estimates corrected for heteroscedasticity of the error term using Autoregressive Conditional Heteroscedasticity (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 the most difference for large cap shares. Regarding the measurement interval, the downward bias in betas from daily returns is associated with not only thin trading but also 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.
Original languageEnglish
Pages (from-to)1525-1538
JournalApplied Financial Economics
Volume21
Issue number20
DOIs
Publication statusPublished - Oct 2011

Keywords / Materials (for Non-textual outputs)

  • beta estimation
  • heteroscedasticity
  • ARCH models
  • interval effect

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