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Censoring and its impact on multivariate testing of the Capital Asset Pricing Model

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  • Robert Brooks
  • Robert Faff
  • Tim Fry
  • Emma Newton

Abstract

The primary objective of this paper is to assess the affect of data 'censoring' on asset pricing tests. This is achieved by modifying tests to incorporate a 'selectivity bias' correction factor in a Gibbons (Journal of Financial Economics, 10, pp. 3-27, 1982) multivariate framework. The sample comprises daily Australian stock returns for 524 companies over the five-year period 1995 to 1999. First, it is found that the use of a 'selectivity bias' correction factor is generally justified in stocks with a degree of censoring at about 50% or above. This represents approximately 52% of the sample. Second, despite the first finding no evidence is found supporting the need for such a correction in asset pricing tests - the degree of support for the CAPM is not materially affected.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 14 (2004)
Issue (Month): 6 ()
Pages: 413-420

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Handle: RePEc:taf:apfiec:v:14:y:2004:i:6:p:413-420

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  1. Fama, Eugene F & French, Kenneth R, 1995. " Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-55, March.
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  7. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
  8. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
  9. Brailsford, Timothy J. & Faff, Robert W., 1997. "Testing the conditional CAPM and the effect of intervaling: A note," Pacific-Basin Finance Journal, Elsevier, vol. 5(5), pages 527-537, December.
  10. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  11. Flannery, Mark J. & Hameed, Allaudeen S. & Harjes, Richard H., 1997. "Asset pricing, time-varying risk premia and interest rate risk," Journal of Banking & Finance, Elsevier, vol. 21(3), pages 315-335, March.
  12. Andrew Clare, Richard Priestley & Steven Thomas, . "Reports of beta's death are premature: evidence from the UK," CERF Discussion Paper Series 96-05, Economics and Finance Section, School of Social Sciences, Brunel University.
  13. Heien, Dale & Wessells, Cathy Roheim, 1990. "Demand Systems Estimation with Microdata: A Censored Regression Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 365-71, July.
  14. Hiemstra, Craig & Jones, Jonathan D, 1994. " Testing for Linear and Nonlinear Granger Causality in the Stock Price-Volume Relation," Journal of Finance, American Finance Association, vol. 49(5), pages 1639-64, December.
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Cited by:
  1. Bissoondoyal-Bheenick, Emawtee & Brooks, Robert D., 2010. "Does volume help in predicting stock returns? An analysis of the Australian market," Research in International Business and Finance, Elsevier, vol. 24(2), pages 146-157, June.
  2. Iqbal, Javed & Brooks, Robert, 2007. "Alternative beta risk estimators and asset pricing tests in emerging markets: The case of Pakistan," Journal of Multinational Financial Management, Elsevier, vol. 17(1), pages 75-93, February.

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