Market Beta as a Measure of Risk in the Context of Outlier Events

Open Access
Author:
Lally, Katharine Gifford
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Timothy T Simin, Thesis Supervisor
  • James Alan Miles, Honors Advisor
Keywords:
  • Beta
  • Outliers
  • Risk
  • Investments
  • Portfolio Management
Abstract:
This event study examines the effectiveness of an equity’s market beta as a measurement of market risk in the context of a black swan event. To evaluate beta’s effectiveness, I examine abnormal returns over a 10-day time window for 30 industry portfolios across 18 negative black swan events. I perform two analyses. The first determines if the abnormal return on the date of a black swan event, as predicted by CAPM, is statistically similar to the abnormal returns of the five days preceding and following the event. The second examines each black swan event’s impact on each industry portfolio’s market beta to determine if the event changes the value of beta. Ultimately, my tests reveal a mixed message. Based on my results, I conclude that beta is an effective measure of risk in the context of a black swan event. This study is particularly relevant to academics who seek to expand their understanding of market beta and to portfolio managers who strive to improve their downside risk management.