Does survivorship bias really matter? An empirical investigation into its effects on the mean reversion of share returns on the JSE Securities Exchange (1984-2006)
AbstractThis paper tests for the impact of survivorship bias by building on the work of Cubbin, Eidne, Firer and Gilbert (2006), and Bailey and Gilbert (2007). The former paper confirmed the existence of mean reversion on the JSE Securities Exchange, because portfolios of shares with high Price to Earnings (P/E) ratios (being those which had tended to outperform recently) underperformed significantly over five years against portfolios of shares with low P/E ratios. The latter paper developed the economic validity of this conclusion by applying liquidity constraints to portfolio formation. This tended to slightly dampen the observed effects, but confirmed the significant presence of mean reversion. In both cases, extensive efforts were made to include all delisted shares in the study to avoid the effects of survivorship bias. This paper updates both studies by extending the period for a further 21 months, and then quantifies the impact of survivorship bias by comparing the results against those of an equivalent study based on a data set of currently listed shares only. The results of our study confirm that the effects of survivorship bias are present and material. While patterns of mean reversion are detected on both data sets, the returns earned on portfolios selected from currently listed shares are significantly higher than the corresponding returns on portfolios selected from all shares. Survivorship bias is therefore confirmed to be a significant issue in such studies, which researchers should be careful to avoid; although it does not necessarily affect the conclusion of the patterns of mean reversion revealed in the earlier studies.
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Bibliographic InfoPaper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 19/2008.
Date of creation: 2008
Date of revision:
Survivorship bias; mean reversion; P/E ratio;
Other versions of this item:
- Evan Gilbert & Dave Strugnell, 2008. "Does Survivorship Bias really matter? An Empirical Investigation into its Effects on the Mean Reversion of Share Returns on the JSE Securities Exchange (1984-2006)," Working Papers 109, Economic Research Southern Africa.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-04 (All new papers)
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