Stock return outliers and beta estimation: The case of U.S. pharmaceutical companies
Journal
Journal of International Financial Markets, Institutions and Money
Date Issued
May 1, 2014
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.