An application of hierarchical linear models to analyse Brazilian financial betas
by Ricardo Goulart Serra
International Journal of Multivariate Data Analysis (IJMDA), Vol. 1, No. 3, 2018

Abstract: It is common to consider that firms from the same industry share a common unlevered beta. This reasoning implies: 1) a nested structure (firms - level 1 - nested in industries - level 2), 2) that unlevered beta variability is concentrated at industry level. I analysed, through hierarchical linear model, 92 Brazilian firms on 31 December 2016. Unlevered betas were calculated with different criteria in terms of: 1) historical period; 2) periodicity of return; 3) market index proxy. I considered two different industry classifications. Results do not favour the common practice as: 1) not all scenarios result in the desired nested structure as well as; 2) the majority of the variability is at firm level (differences in firms from the same industry). As a comparison, I studied 282 North American firms and encountered nested structure in all scenarios but with large variability among firms from the same industry.

Online publication date: Fri, 18-May-2018

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