TAILIEUCHUNG - Towards unbiased portfolio daily returns

This paper describes a new method to generate unbiased equal-weighted portfolio daily returns by removing the impacts of bid-ask bounce and non-synchronous trading. For example, for the CRSP daily equal-weighted market index over 1964 to 1993 (EWRETD), the annual bias of the time series generated by our method is , considerably smaller than 6% as reported by Canina et al. (1998). In addition, we also discuss the research impact by using both biased and unbiased daily EWRETD on beta, alpha, volatility and event study. The paper concludes that the new method should be applied for future estimation of portfolio daily returns which can be either equal-weighted or value-weighted. | Journal of Applied Finance Banking vol. 3 no. 6 2013 143-160 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2013 Towards Unbiased Portfolio Daily Returns Yuxing Yan1 Abstract This paper describes a new method to generate unbiased equal-weighted portfolio daily returns by removing the impacts of bid-ask bounce and non-synchronous trading. For example for the CRSP daily equal-weighted market index over 1964 to 1993 EWRETD the annual bias of the time series generated by our method is considerably smaller than 6 as reported by Canina et al. 1998 . In addition we also discuss the research impact by using both biased and unbiased daily EWRETD on beta alpha volatility and event study. The paper concludes that the new method should be applied for future estimation of portfolio daily returns which can be either equal-weighted or value-weighted. JEL classification numbers G10 G11 Keywords Equal-weighted market index Systematic bias Methodology 1 Introduction In finance it has been a common practice for researchers to use portfolios instead of individual stocks. For example Pastor and Stambaugh 2003 divide all stocks into deciles according to liquidity. In designing their famous 3-factor model Fama and French 1992 1993 group stocks into 6 portfolios by size and book-to-market ratio. Easley et al. 2010 analyze the impact of informed trading by classifying stocks into deciles based on Probability of Informed Trading. By suggesting a now-famous momentum effect Jegadeesh and Titman 1993 2001 assembly stocks into deciles on their past performance. Compared with individual stocks portfolios will dampen or remove the influences of extreme cases stocks . The statistical properties of a portfolio are more stable than those of individual stocks. After portfolios are formed their returns are estimated and compared based on various strategies or hypotheses. To estimate portfolio returns value-weighed and equal-weighted are two commonly used 1Department of Economics and

• Tài chính doanh nghiệp
• Equal weighted market index
• Systematic bias
• Portfolio daily returns
• Either equal weighted
• New method should be applied