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Research Insight - Evaluating the Accuracy of Beta Forecasts - September 2014
Sep 8, 2014
In this Research Insight, we present a framework for evaluating the relative accuracy of beta forecasts. We consider naive betas, historical betas, and predicted betas. Our technique relies on observing the residual returns of a large universe of stocks over various time periods. We find that the expected residual volatility decreases as the beta estimates become more accurate. We also demonstrate residual volatilities can be translated into beta estimation errors. We find that across the beta spectrum and across time, the predicted betas were more accurate than the historical betas, which were in turn more accurate than the naive betas.
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Research authors
- Zoltán Nagy, Executive Director, MSCI Research
- Jose Menchero
- Ashu Singh