1. Censoring and its impact on multivariate testing of the Capital Asset Pricing Model
- Author
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Robert W. Faff, Tim R. L. Fry, Emma Newton, and Robert Darren Brooks
- Subjects
Economics and Econometrics ,Multivariate statistics ,Investment theory ,Actuarial science ,Consumption-based capital asset pricing model ,Arbitrage pricing theory ,Economics ,Capital asset pricing model ,Finance ,Stock (geology) - 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.
- Published
- 2004
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