Beta estimation in New Zealand

Beta is an important input in the cost of capital calculations. However, it is not directly observable, so an estimate needs to be made. Beta can be easily estimated using simple regression techniques. However, there is evidence that more complex estimation procedures generate superior beta forecasts in international markets. In New Zealand, several betas out-perform OLS betas in a statistical sense. Shrinkage betas perform best, generating precision improvements of up to 17% over their OLS counterparts. •In New Zealand, several betas out-perform OLS betas in a statistical sense.•Shrinkage betas perform best generating precision improvements of up to 17% over their OLS counterparts.•Performance gains decline as the estimation period increases but increase as the prediction window increases.•Small stock betas are more difficult to estimate accurately than their large stock counterparts.