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Forecasting Beta: How Well Does the ‘Five‐Year Rule of Thumb’ Do?

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  • Nicolaas Groenewald
  • Patricia Fraser

Abstract

CAPM betas are generally estimated from historical data and applied to a future period. There is widespread evidence that the CAPM betas vary considerably over time and this raises two questions: can this variation be explained and can it be forecast better than the ‘five‐year rule of thumb’ (i.e using the most recently estimated beta)? We estimate time‐varying betas and explain the time‐variation in the betas using regression models which we subsequently use for forecasting. We find that forecasting equations have good explanatory power but that their forecasts are dominated, on average, by the five‐year rule of thumb.

Suggested Citation

  • Nicolaas Groenewald & Patricia Fraser, 2000. "Forecasting Beta: How Well Does the ‘Five‐Year Rule of Thumb’ Do?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(7‐8), pages 953-982, September.
    • Handle: RePEc:bla:jbfnac:v:27:y:2000:i:7-8:p:953-982
    DOI: 10.1111/1468-5957.00341
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    Cited by:

    1. Jimmy A. Saravia & Carlos S. García & Paula M. Almonacid, 2021. "The determinants of systematic risk: A firm lifecycle perspective," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1037-1049, January.
    2. Hong, Jiawei & Yu, Xiaojian & Xiao, Weilin & Zhang, Xili, 2022. "The dispersion of beta estimates and the investors’ heterogeneous Beliefs：Evidence from the stock market in China," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 540-550.
    3. Prukumpai, Suthawan, 2015. "Time-varying Industrial Portfolio Betas under the Regime-switching Model:Evidence from the Stock Exchange of Thailand," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 22(2), December.

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