Dimson Adjusted Beta
factor.formula
Dimson regression model:
Dimson Adjusted Beta:
in:
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The return on stock $i$ at time $t$.
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The return on the market portfolio at time $t$.
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At time $t$, the risk-free rate is .
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The return on stock $i$ at time $t-1$.
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The return on the market portfolio at time $t-1$.
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At time $t-1$, the risk-free rate.
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The return on stock $i$ at time $t+1$.
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The return on the market portfolio at time $t+1$.
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At time $t+1$, the risk-free interest rate.
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The intercept term of stock $i$ represents the expected return of the stock when the market risk premium is 0.
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The sensitivity of stock $i$'s return to the market return lagged by one period (regression coefficient) reflects the impact of the previous period's change in the market return on the stock's current return.
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The sensitivity of stock $i$'s return to the current market return (regression coefficient) indicates the impact of changes in the current market return on the stock's current return.
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The sensitivity (regression coefficient) of the stock $i$ return to the market return leading one period reflects the impact of the change in the market return in the next period on the stock's current return.
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The residual term of the regression model represents the stock return fluctuations that cannot be explained by the model.
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Dimson adjusted beta is the sum of the beta coefficients of the lagged, current and leading market risk premiums and is used to measure the systematic risk of a stock.
factor.explanation
Dimson adjusted beta is designed to address the estimation bias in traditional beta calculations caused by infrequent (or asynchronous) stock trading. Traditional beta is usually regressed based on the stock's daily return and the market's daily return, but when the stock is not actively traded, this method may not accurately reflect the stock's sensitivity to market risk. The Dimson method captures the delayed reaction of stock prices that may occur due to infrequent trading by introducing lag terms and lead terms of market returns into the regression model. The Dimson adjusted beta is obtained by summing the regression coefficients, which can better reflect the stock's systematic risk exposure over a period of time, and is especially suitable for stocks that are not actively traded or have poor liquidity.