The impact of reference-day risk on beta estimation and a proposed solution

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Authors

Sahadev, Keshav
Ward, Michael
Muller, Chris J.

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Routledge

Abstract

The ability to accurately estimate systematic risk (or beta) when reference-day risk is considered, is an ineluctable requirement for all applications of the capital asset pricing model (CAPM). This research documents evidence of reference-day risk for shares on the Johannesburg All Share Index. In response to the need for greater accuracy when estimating systematic risk, this paper contributes a volume-weighted-average-price (VWAP) method for estimating beta which may be employed when reference-day risk is considered. Furthermore, this research applies a graphical time-series approach to test the underlying risk-reward tenet postulated by the CAPM. Using beta as a measure of systematic risk, this research finds that the CAPM appears to imperfectly specify the risk-reward trade-off.

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Keywords

Capital asset pricing model (CAPM), Beta, Reference-day risk, Volume-weighted-average-price (VWAP), Systematic risk, Equilibrium, Market, Selection, Returns, Shares

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Citation

Keshav Sahadev, Michael Ward & Chris Muller (2018) The impact of reference-day risk on beta estimation and a proposed solution, Investment Analysts Journal, 47:4, 327-342, DOI: 10.1080/10293523.2018.1497126.