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Bridge over ocean
1 September 2003 Financial Analysts Journal Volume 59, Issue 5

Outlier-Resistant Estimates of Beta

  1. R. Douglas Martin
  2. Timothy T. Simin

Depending on their location, outliers in returns can substantially bias ordinary least-squares estimates of beta. We introduce a new beta estimate that is resistant to outliers that cause the most bias in OLS estimates but produces estimates similar to OLS for outlier-free data. The outlier-resistant beta is an intuitively appealing weighted least-squares estimate with data-dependent weights. We show that the resistant beta is a better predictor of future risk and return characteristics than is the OLS beta in the presence of outliers and is, therefore, a valuable complement to the OLS beta. Our analysis reveals that small companies' betas are most susceptible to outliers.

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