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Stock return outliers and beta estimation: The case of U.S. pharmaceutical companies

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  • Theodossiou, Alexandra K.
  • Theodossiou, Panayiotis

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.

Suggested Citation

  • Theodossiou, Alexandra K. & Theodossiou, Panayiotis, 2014. "Stock return outliers and beta estimation: The case of U.S. pharmaceutical companies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 30(C), pages 153-171.
    • Handle: RePEc:eee:intfin:v:30:y:2014:i:c:p:153-171
    DOI: 10.1016/j.intfin.2014.02.002
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    OLS estimation; Robust M estimation; Stock beta; Equity cost of capital; Pharmaceutical industry;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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