Beta Forecasting at Long Horizons

Systematic (CAPM beta) risk forecasting for long horizons, such as one year, play an important role in financial management. This paper evaluates a variety of beta forecasting procedures for long forecast horizons. The widely utilized Fama-MacBeth approach based on five years of monthly returns is found to be unreliable in terms of mean absolute (and squared) forecast error and statistical bias. The most accurate forecasts are found to be generated from an autoregressive model of realized beta. In addition to analyzing the statistical properties of these forecasts, the economic significance between the different approaches is demonstrated through evaluating investment projects