Beta Determinants, an Evaluation of DJIA Firms

Beta Determinants, an Evaluation of DJIA Firms

2010

Zin Yau Heng, Phuong Ho, Khuong Nguyen, Tai Tran

Abstract

Years after its inception, beta is still a major cornerstone of the financial industry, widely used by both academic and practitioners. Given its importance, literature continually evaluates and proposes improvements on beta forecast. This document extends Ghysels and Jacquier (2006) and examines firm characteristics and macro-economic characteristics which may affect realized beta (Andersen et al 2005) of five assets from the Dow Jones Industrial Average, including Home Depot, Coca-Cola, McDonald’s, Procter and Gamble, and Wal-Mart for the 1991 to 2005 period. Data is downloaded from WRDS and other academic databases. Single-factor models, multivariate models and visual analysis are employed as part of the methodology. Statistics and graphs are done using Stata. We find each firm having unique characteristics and its beta is influenced by different variables. We document improvements of multivariate model over single-factor model. In sum, we find Default Premium has strongest influence on beta of Procter and Gamble, as measured by superior R² and level of confidence.

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