Associations between Realized Returns and Risk Proxies Using Non-Random Samples
Accounting
Speaker: | Katherine Schipper, Duke University |
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Date: | Wednesday 13 November 2013 |
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Time: | 14.00 - 15.30 |
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Location: | Streatham Court D |
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Further details
We provide evidence that associations between realized returns and common risk proxies (factor betas and
implied cost of equity estimates) vary with properties of the sample returns distribution used to estimate those
associations. We consider two forms of non-random sampling from a reference distribution of realized returns
for all CRSP firms with at least 12 consecutive monthly returns during 1976-2009. First, using non-random
sampling based on the sign of returns, we show that risk measures are negatively (positively) associated with
realized returns in bad (good) states. Second, and more generally, we focus on the effects of sample selection
criteria, in the form of data requirements, that result in non-random selection from the reference distribution,
using the sample for which five implied cost of equity estimates can be estimated as an example. We show that
the returns in the cost of equity sample are a non-random sample from the reference distribution, and that results
of association tests with realized returns are sensitive to this form of non-random sampling. We illustrate a
bootstrapping approach to adjust the cost of equity sample returns distribution to match the reference returns
distribution. Reversing inferences from the unadjusted sample, associations of implied cost of equity estimates
with realized returns are positive in the distribution-matched samples.