Some evidence on the stability of beta coefficients on the JSE

Abstract

Knowledge of beta stability is crucial for projections involving the use of beta coefficients, in particular, in the areas of project evaluation and portfolio design. This paper investigates the issue of beta stability on the JSE. The investigation reveals how spurious inferences on stability can be made if estimation techniques do not correct for thin trading. The findings reveal that the levels of stability are similar to that reported on UK and USA stock markets once the distortions caused by thin trading are removed. Further a particular phenomenon associated with beta instability, known as the regression tendency, was investigated. This phenomenon was found to be present on the JSE and it was demonstrated empirically how a Bayesian adjustment counteracts this regression bias.

Key Words:

• Systematic risk
• Beta stability
• Beta coefficients