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Heteroscedasticity and interval effects in estimating beta: UK evidence

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  • Seth Armitage
  • Janusz Brzeszczynski

Abstract

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.

Suggested Citation

  • Seth Armitage & Janusz Brzeszczynski, 2011. "Heteroscedasticity and interval effects in estimating beta: UK evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 21(20), pages 1525-1538.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:20:p:1525-1538
    DOI: 10.1080/09603107.2011.581208
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    References listed on IDEAS

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    3. Dębski Wiesław & Feder-Sempach Ewa & Świderski Bartosz, 2014. "Intervalling Effect On Estimating The Beta Parameter For The Largest Companies On The WSE," Folia Oeconomica Stetinensia, Sciendo, vol. 14(2), pages 270-286, December.
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    6. Jan Jakub Szczygielski & Chimwemwe Chipeta, 2023. "Properties of returns and variance and the implications for time series modelling: Evidence from South Africa," Modern Finance, Modern Finance Institute, vol. 1(1), pages 35-55.

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