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A Note on Errors in Variables and Estimates of Systematic Risk

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  • Ray Ball

    (Australian Graduate School of Management, University of N.S.W. I am indebted to a referee for helpful comments; errors and inadequacies remain mine.)

Abstract

Australian capital markets, being relatively “thin†, present the researcher with a potentially large “errors in the variables†problem. The standard formulation of the problem is inappropriate for estimating securities' systematic risks. The unusual feature in this context is that the regressor (the rate of return on the “market index†) is defined as the sum of the feasible regressands (the rates of return on individual securities). As a result, errors in the regressor are not independent of errors in the regressand. An alternative formulation is suggested, which is simple and similar to the conventional formulation. While the alternative is more realistic, it is not sufficiently so: the real problem of errors in this context is much more complex.

Suggested Citation

  • Ray Ball, 1977. "A Note on Errors in Variables and Estimates of Systematic Risk," Australian Journal of Management, Australian School of Business, vol. 2(1), pages 79-84, April.
    • Handle: RePEc:sae:ausman:v:2:y:1977:i:1:p:79-84
    DOI: 10.1177/031289627700200105
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    References listed on IDEAS

    as
    1. Rosenberg, Barr & Houglet, Michel, 1974. "Error Rates in CRSP and Compustat Data Bases and their Implications," Journal of Finance, American Finance Association, vol. 29(4), pages 1303-1310, September.
    2. Black, Fischer & Scholes, Myron, 1974. "The effects of dividend yield and dividend policy on common stock prices and returns," Journal of Financial Economics, Elsevier, vol. 1(1), pages 1-22, May.
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