JSM 2004 - Toronto

Abstract #300921

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Activity Number: 431
Type: Contributed
Date/Time: Thursday, August 12, 2004 : 10:30 AM to 12:20 PM
Sponsor: Business and Economics Statistics Section
Abstract - #300921
Title: Robust Estimation of Electric Utility Betas
Author(s): James B. McDonald*+
Companies: Brigham Young University
Address: 130 Faculty Office Building, Provo, UT, 84602-2363,
Keywords: electric utilities ; stock returns ; robust estimation ; beta ; skewness ; kurtosis
Abstract:

Similarly with nonregulated firms, the distribution of electric utility stock returns and capital asset pricing model regression errors are characterized by skewness and kurtosis (fat tails). Electric utility stock returns, however, tend to be positively skewed due to lax regulation of rates of return on the book value of common equity (ROE). Electric utility rates of return on common equity have a strong lower boundary and a weak upper boundary due to lax regulation. Stock returns for unregulated firms or portfolios, such as the S&P 500 are often negatively skewed and characterized by kurtosis. This paper reviews the skewness and kurtosis of electric utility returns, and applies four flexible probability density functions (pdf) in estimating the Capital Asset Pricing Model and compares the results with the OLS and LAD estimators. Estimation based on the flexible pdf's provides the potential for improved efficiency. OLS is not the best estimator of betas. Using simulations, flexible pdf's yield results at least as efficient as OLS in the presence of skewness or kurtosis and similar results when the errors are normally distributed.

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