Beta and return: One-day effect
Martin Feinberg, Damir Tokic. Journal of Asset Management. London: Jul
2002.Vol.3, Iss. 1; pg. 67, 6 pgs
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Abstract (Document Summary)
This study presents 2 extreme single-day drops in stock prices due to systematic risk
shocks to the market: the Asian crisis of Sept. 1, 1998, and the Sept. 11, 2001, terrorist
attack. The results show that on both dates, stocks with higher betas decreased
relatively more in a single day than stocks with lower betas. Similarly, stocks with higher
betas are found to increase relatively more in a single-day rise in the stock market than
stocks with lower betas. Several additional single-day extreme returns validate these
findings. Therefore, it is argued that beta is a valid measure of systematic risk in a
single-day setting. The empirical findings have important implications for individual
investors in their financial planning efforts.
Full Text (1601 words)
Copyright Henry Stewart Conferences and Publications Ltd. Jul 2002[Headnote]
Abstract This study presents two extreme single-day drops in stock prices due to
systematic risk shocks to the market: the Asian crisis of 1st September, 1998, and the
11th September, 2001, terrorist attack. The results show that on both dates, stocks with
higher betas decreased relatively more in a single day than stocks with lower betas.
Similarly, stocks with higher betas are found to increase relatively more in a single-day
rise in the stock market than stocks with lower betas. Several additional single-day
extreme returns validate these findings. Therefore, it is argued that beta is a valid
measure of systematic risk in a single-day setting. The empirical findings of this paper
have important implications for individual investors in their financial planning efforts.
[Headnote]
Keywords: beta; systematic risk; extreme returns; market shocks; CAPM; size effect
Introduction
This study investigates whether stocks with higher betas decrease more than stocks with
smaller betas in a single day following a major external shock to the market. It examines
the single-day beta-return relation during the two major dips in the market: the 31st
August, 1998, Asian crisis shock and the 11th September, 2001, terrorist attack.
The turmoil in the stock market during the Asian crisis resulted in the largest percentage
decline in the Dow Jones Industrial Average (DJIA) at that time, since the October 1987
crash. On 31 st August, 1998, the DJIA fell by 512.61 points or 6.37 per cent. The Wall
Street Journal reported the following day that the Index, battered all month by Russia's
problems and other global turmoil, was at its lowest level since 13th November, 1997.
Only nine days later, on 8th September, 1998, the DJIA jumped 380.53 points or 4.98
per cent. The next day, the Wall Street Journal reported that the surge was spurred by
Federal Reserve Chairman Alan Greenspan's indication that the Fed might consider
lowering interest rates.
The terrorist attack on 11 th September, 2001, is an example of another systematic risk
shock to an already weakening US economy. When the market reopened on 17th
September, 2001, the Dow Jones fell by 684 points, which was the largest point drop
ever.
This study contributes to the existing literature in the area of the validity of beta. The
practical implications of the study contribute to the individual investor's understanding of
the risk-return relation. Specifically, the research question is whether the differences in
betas among Dow Jones firms explain the relative single-day performance following the
major shocks to the market. Several additional extreme single-days returns of at least a
4 per cent change in the DJIA are investigated to validate the findings.
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Data
The data include 30 companies listed in the Dow Jones Industrial Index representing all
major industries. The percentage change in a security price from day-to-day is
calculated from the previous day close price. The DJIA percentage drop or rise is
calculated in the same manner. The data are obtained from the Money & Investing
section of the Wall Street Journal, Ist September, 1998, 9th September, 1998, and 17th
September, 2001. The alternative source of the data for additional single-day extreme
returns is the Yahoo Finance historical daily returns web page.
The measure of systematic risk, or beta, is routinely calculated by major research firms,
such as Merrill Lynch and Morgan Stanley, and reported in various research analysis
reports. The sources of betas for this study are the Yahoo Finance Company Report
Page and the Quicken.Com-Stock Evaluator. Table 1 presents the descriptive statistics
of the sample for each period.
Methodology and results
The objective of this study is to test the linearity of expected returns and corresponding
betas. Specifically, the hypothesis is that the beta, as a measure of systematic risk, was
able to explain the drop and rise of the corresponding stock. Accepting this hypothesis
would mean that the beta is a valid predictor of expected returns in a single-day period.
The model used in this study is simple linear multiple regression.
The first regression was estimated using the 30-stock DJIA data from 1st September,
1998, which was the day when stocks experienced a substantial loss in value. The
metric dependent variable is the percentage change in the market price of individual
stocks from the previous day. The independent variable is the corresponding beta. The
second regression is estimated using the 30-stock DJIA data on 8th September, 1998,
which was the recovery day. The third regression tests the variable relations of the
market drop of 17th September, 2001.
Table 2 presents the results of the three separate regression models. The market dip of
1st September, 1998, model shows that the regression coefficient is negative and
significant at the 1 per cent level. Similarly, the model of the market dip of 17th
September, 2001, also has a significant negative regression coefficient. In contrast, the
regression coefficient is significantly positive during the single-day rising market on 8th
September, 1998.
Therefore, we can argue that stocks with higher betas decrease more in both periods
than stocks with lower betas. Similarly, stocks with higher betas increase relatively more
than stocks with lower betas do in a single-day stock market rebound. This evidence
contributes to the argument that beta can be a valid analytical tool in financial planning.
In order to validate the results of the relations between the betas and the single-day
extreme returns, the study also includes an additional seven days. These extreme
returns are selected based on the criterion of at least a 4 per cent single-day increase or
decrease in the DJIA. Table 3 provides the descriptive statistics for these seven extreme
single-day returns. Table 4 presents the results of these seven separate regression
models.
Five of the seven models have significant regression coefficients. In these five models,
the regression coefficient signs are as predicted, negative when the market declines and
positive when the market rises. The 12th March, 2000, model and the 17th October,
2000, model do not have significant regression coefficients. The model of 12th March,
2000, is insignificant because the DJIA was heavily impacted by a 30 per cent decrease
in the value of Proctor & Gamble, which is the lowest beta stock in the DJIA. The model
of 17th October, 2000, is insignificant in the rising market, as investors shifted their
money from high beta technology stocks into lower beta traditional sector stocks.
Summary
The empirical findings of this paper have important implications for individual investors in
their financial planning efforts. This study presents two extreme single-day drops in stock
prices resulting from systematic risk shocks to the market: the Asian crisis of 1st
September, 1998, and the 11th September, 2001, terrorist attack. It is found that on both
dates, stocks with higher betas decreased relatively more in a single day than stocks
with lower betas. Similarly, it is found that stocks with higher betas increase relatively
more during the single-day rise in the stock market than do lower beta stocks. Several
additional single-day returns validate these findings. Therefore, it is argued that beta is a
valid measure of systematic risk in a single-day setting.
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Table 1
Table 2
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Table 3
Table 4
[Reference]
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[Author Affiliation]
Received (in revised form): 6th March, 2002
Martin Feinberg*
[Author Affiliation]
is an Assistant Professor of Quantitative Methods at the University of Texas-Pan
American. His research interests include the areas of financial planning models and
multivariate analysis. His publications include articles in the Journal of American
Academy of Business - Cambridge and Social Science Computer Review.
[Author Affiliation]
Damir Tokic
[Author Affiliation]
is a doctoral candidate in Finance at the University of Texas-Pan American. His research
interests are in the areas of Internet stock valuation and financial planning models. His
publications include articles in Credit and Financial Management Review and Business
Quest.
*CIS/QUMT Department, College of Business Administration, University of Texas-Pan
American, Edinburg, TX 78539, USA Tel: +1 956 381 2801; Fax: +1 956 381 3367; email: feinbergm@panam.edu