An Examination of Blume and Vasicek Betas

This paper examines the Vasicek and Blume methods for correcting OLS betas. The primary conclusions are that typical applications of Vasicek's method seem to mistakenly equate the prior distribution with the cross‐sectional distribution of estimated rather than true betas, that Blume's implicit forecast of any tendency for true betas to regress towards one may not be desirable, that preliminary partitioning of firms into industry type groups (as is typical for Vasicek) is desirable, and that conversion of OLS equity betas to asset betas before applying the correction process is also desirable.