On the Beta Estimation and Cross-sectional Analysis of Expected Stock Returns in Taiwan

Basing our empirical study on a sample of corporations listed on Taiwan Stock Exchange and Taiwanfs OTC Securities Exchange between 1981 and 2000, we find that Fama and French(1992) approach, including estimation procedure and the explanatory power of beta, is sensitive to the length of time to estimate pre-ranking beta, the size of grouping portfolio, and the return measurement interval used in estimating post-ranking beta. In addition, the result indicates that monthly beta fails to capture the cross-section of expected returns in Taiwan. However, we have presented evidence that average returns do reflect substantial compensation for beta risk, provided that betas are measured at the quarterly or even larger intervals, for aged firm samples sorted into 36 portfolios. This finding is in support of the view that the beta is still alive in Taiwan. Keywords: CAPM, security market line, systematic risk, return measurement interval.