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Measuring the impact of extreme observations on CAPM alphas: Some methodological issues

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  • De Moor, Lieven
  • Sercu, Piet

Abstract

Extreme observations can bias the average return calculation and this bias affects small stocks more. We study several filters that could help to alleviate such a bias. As an illustrative example, we examine the impact of these filters on the size premium around the world. Our findings carry important implications for future empirical research in international stock returns.

Suggested Citation

  • De Moor, Lieven & Sercu, Piet, 2015. "Measuring the impact of extreme observations on CAPM alphas: Some methodological issues," Finance Research Letters, Elsevier, vol. 15(C), pages 1-10.
    • Handle: RePEc:eee:finlet:v:15:y:2015:i:c:p:1-10
    DOI: 10.1016/j.frl.2014.05.002
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    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Michael J. Brennan & Ashley W. Wang, 2010. "The Mispricing Return Premium," The Review of Financial Studies, Society for Financial Studies, vol. 23(9), pages 3437-3468.
    3. De Moor, Lieven & Sercu, Piet, 2013. "The smallest firm effect: An international study," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 129-155.
    4. Knez, Peter J & Ready, Mark J, 1997. "On the Robustness of Size and Book-to-Market in Cross-Sectional Regressions," Journal of Finance, American Finance Association, vol. 52(4), pages 1355-1382, September.
    5. Elena Asparouhova & Hendrik Bessembinder & Ivalina Kalcheva, 2013. "Noisy Prices and Inference Regarding Returns," Journal of Finance, American Finance Association, vol. 68(2), pages 665-714, April.
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    Cited by:

    1. Andor, György & Bohák, András, 2017. "Identifying events in financial time series – A new approach with bipower variation," Finance Research Letters, Elsevier, vol. 22(C), pages 42-48.

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    More about this item

    Keywords

    Small firm; Errors in data; Least trimmed squares; Jensen’s inequality;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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