Erasmus university rotterdam

Beta estimates

The second part of the methodology required using OLS for the estimation of betas for the individual stocks using the historical weekly returns. Following the methodology used by Fama & Macbeth (1973), historical returns of the individual stocks were calculated and beta was estimated by using the OLS regression method. Betas were estimated using the statistical software Eviews 6.0 for individual stocks for the emerging countries. For each company the returns in the sample are regressed on the proxy for the market, depending on the version of the CAPM used. Four versions of the CAPM were used and three time periods were considered. The estimated beta’s can be found in appendices F to I.
The CAPM has a few testable implications. The first proposition is that the relationship between risk and expected return is linear. In order to test the linearity of the relationship between risk and expected return, the assumption of a perfect capital market has to be made, implying that no information or transaction costs are incurred by investors. Shanken (1995) mentions that the idea of testing the CAPM through the assumption of a perfect market lacks applicability. The second proposition is that beta is the complete measure of risk. This can be tested by adding additional variables to the regressions, if other variables besides beta have explanatory power this is evidence against the CAPM. Lastly, if it is assumed that investors are risk averse, higher risk should be associated with higher returns.
The estimated betas can be found in appendices F to I. The ranges of the estimated betas can be found in Table 6. The table shows that, when considering the Global CAPM, the highest beta value is found in Turkey, and the lowest beta value is found in Morocco. All beta values estimated using the Global CAPM and the Local CAPM are positive, which indicates a positive risk return relationship. However when considering the Local CAPM, the highest value can be found in Israel and the lowest value in Egypt. Interestingly, the Global CAPM betas of Morocco have a maximum value of 0.360 which is exceptionally low. When estimating betas according to the local CAPM values become more typical. The Three Moment CAPM and the Four Moment CAPM sometimes lead to negative beta values.
Table 6: Minimum and Maximum values of the estimated betas