(1) Department of Economics, Ben-Gurion University of the Negev, Beer Sheva, 84105, Israel;(2) Department of Economics, Hebrew University of Jerusalem, Jerusalem, 91000, Israel;(3) Central Bureau of Statistics, Jerusalem, 91342, Israel
Abstract:
This paper presents evidence that Ordinary Least Squares estimators of beta coefficients of major firms and portfolios are highly sensitive to observations of extremes in market index returns. This sensitivity is rooted in the inconsistency of the quadratic loss function in financial theory. By introducing considerations of risk aversion into the estimation procedure using alternative estimators derived from Gini measures of variability one can overcome this lack of robustness and improve the reliability of the results.