Beta Estimation Using High Frequency Data
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Using high frequency stock price data in estimating nancial measures often causes serious distortion. It is due to the existence of the market microstructure noise, the lag of the observed price to the underlying value due to market friction. The adverse e ect of the noise can be avoided by choosing an appropriate sampling frequency. In this study, using mean square error as the measure of accuracy in beta estimation, the optimal pair of sampling frequency and the trailing window was empirically found to be as short as 1 minute and 1 week, respectively. This surprising result may be due to the low market noise resulting from its high liquidity and the econometric properties of the errors-in-variables model. Moreover, the realized beta obtained from the optimal pair outperformed the constant beta from the CAPM when overnight returns were excluded. The comparison further strengthens the argument that the underlying beta is time-varying.
DescriptionHonors Thesis in Finance, Econ 201-202FS.
High Frequency data
Market microstructure noise
Beta trailing window
Optimal sampling interval
CitationRyu, Angela (2011). Beta Estimation Using High Frequency Data. Honors thesis, Duke University. Retrieved from https://hdl.handle.net/10161/3542.
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Rights for Collection: Undergraduate Honors Theses and Student papers