A major factor that affects the reliability of a firm’s beta is the quality of the data used in computing the beta. Statistics theories recognizes that equity beta estimates generated from regression analysis will only produce an estimate. The truth which may not be obvious is that the real equity beta might be above or below the estimate that is produced by applying regression analysis to a particular set of data. Moreover, using historic data to estimate beta suggest that historic relationship can be used to predict the future relation of stock and market returns.
For emerging market, estimating beta in markets with fewer stocks listed can be challenges especially with respect to estimation choices on return intervals, the market index and the return period. Liquidity is very limited for many stock in emerging markets. This makes beta estimates derived from short return intervals to be a lot more biased. Specifically, estimating beta using daily or weekly returns in such markets will not result into good measure of true market risk of the firm.
Also for emerging markets, there are significant changes in the market conditions of firms over short intervals. As result, regression calculations will produce beta estimates that bears little resemblance to the firms as they exist in the presence even for 5 years of returns.
On the impact of recent global financial crisis on a firm’s beta, costs of equity and costs of capital, it had severe effect on global markets. However, the magnitude of the impact varied from countries to countries. Using New Zealand (a commodity-based economy) and Singapore (an open international economy) as case study, the impact varied. The two economies have similar population and Gross Domestic Products which makes their comparison appropriate.
The impact of the global financial crisis on stocks in New Zealand markets was not significant and did not last for so long. The banks in New Zealand did not invest in the US mortgage assets which...