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Title: Stock return outliers and beta estimation: The case of U.S. pharmaceutical companies
Authors: Theodossiou, Alexandra K. 
Theodossiou, Panayiotis 
Keywords: Equity cost of capital;OLS estimation;Pharmaceutical industry;Robust M estimation;Stock beta
Category: Economics and Business
Field: Social Sciences
Issue Date: 1-May-2014
Publisher: Elsevier BV
Source: Journal of International Financial Markets, Institutions and Money, 2014, Volume 30, Issue 1, Pages 153-171
Abstract: Efficient estimation of the equity cost of operating public corporations is essential for a rational investment policy. Traditional OLS beta estimates of a single stock are known to suffer from violations of normality due to outliers - extreme returns caused by large, unpredictable company-specific events. We confirm the presence of an outliers-driven, often significant bias in OLS beta estimates by undertaking parallel estimates with a related method based on a mixed-return model that follows Huber's Robust M (HRM) estimator. We demonstrate that the OLS bias can be substantial even in a sample spanning 18 years of monthly observations.
ISSN: 10424431
Rights: © 2014 Elsevier B.V.
Type: Article
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