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

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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.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/09603100410001673649

Affiliations: 1: Research Development Unit Royal Melbourne Institute of Technology 239 Bourke Street Melbourne 3000 Australia 2: Department of Accounting and Finance Faculty of Business and Economics PO Box 11E Monash University Victoria 3800 Australia 3: School of Economics and Finance Royal Melbourne Institute of Technology 239 Bourke Street Melbourne 3000 Australia 4: Department of Econometrics and Business Statistics PO Box 11E Monash University Victoria 3800 Australia

Publication date: March 15, 2004

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