Hostname: page-component-cd9895bd7-lnqnp Total loading time: 0 Render date: 2024-12-22T22:47:02.852Z Has data issue: false hasContentIssue false
  • English
  • Français

The Application of Errors-in-Variables Methodology to Capital Market Research: Evidence on the Small-Firm Effect

Published online by Cambridge University Press:  06 April 2009

James R. Booth  and
Richard L. Smith II
Get access Rights & Permissions [Opens in a new window]

Abstract

Errors in variables due to nonsynchronous trading and benchmark error are significant problems for capital market research. This paper develops the use of direct and reverse regression to bound true coefficient estimates when the data exhibit error structures arising from these two sources both separately and jointly. The approach appears to have broad applicability for capital markets research. As an example, the paper reexamines the small-firm effect to show that it cannot be attributed to nonsynchronous trading or benchmark error in the estimated variance of the market portfolio. This result is shown to hold even when the tax-selling effect is controlled for by excluding January returns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 20 , Issue 4 , December 1985 , pp. 501 - 515
Copyright
Copyright © School of Business Administration, University of Washington 1985

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Banz, Rolf. “The Relationship between Return and Market Value of Common Stocks.” Journal of Financial Economics, Vol. 9 (03 1981), pp. 3–18.CrossRefGoogle Scholar
[2]Dimson, Elroy. “Risk Measurement when Shares are Subject to Infrequent Trading.” Journal of Financial Economics, Vol. 7 (06 1979), pp. 197–226.CrossRefGoogle Scholar
[3]Fowler, David J., and Rorke, C. Harvey. “Risk Measurement when Shares Are Subject to Infrequent Trading: Comment.” Working paper, Faculty of Management, McGill University, Montreal, Canada (03 1981).Google Scholar
[4]Frisch, Ragnar. Statistical Confluence Analysis by Means of Complete Regression Systems. Oslo, Norway: University Institute of Economics (1934).Google Scholar
[5]Ibbotson, Roger G., and Sinquefield, Rex A.. Stocks, Bonds, Bills and Inflation: The Past (1926–1976) and the Future (1977–2000). Charlottesville, Virginia: Financial Analyst Research Foundation (1977).Google Scholar
[6]Kiem, D. B. “Size Related Anomalies and Stock Return Seasonality: Empirical Evidence.” Journal of Financial Economics, Vol. 12 (06 1983), pp. 13–32.CrossRefGoogle Scholar
[7]Klepper, Steven, and Learner, Edward E.. “Consistent Sets of Estimates for Regressions with Errors in All Variables.” Working Paper, University of California, Los Angeles (1982).Google Scholar
[8]Lavely, Joe; Wakefield, Gordon; and Barrett, Bob. “Toward Enhancing Beta Estimates.” Journal of Portfolio Management, Vol. 6 (Summer 1980), pp. 43–46.CrossRefGoogle Scholar
[9]Reinganum, Marc R. “The Anomalous Stock Market Behavior of Small Firms in January: Empirical Tests for Tax-Loss Selling Effects.” Journal of Financial Economics, Vol. 12 (06 1983), pp. 89–104.CrossRefGoogle Scholar
[10]Reinganum, Marc R. “A Direct Test of Roll's Conjecture on the Firm Size Effect.” The Journal of Finance, Vol. 37 (03 1982), pp. 27–35.CrossRefGoogle Scholar
[11]Reinganum, Marc R. “Misspecification of Capital Asset Pricing: Empirical Anomalies Based on Earnings' Yields of Market Values.” Journal of Financial Economics, Vol. 9 (03 1981), pp. 19–46.CrossRefGoogle Scholar
[12]Roll, Richard. “A Possible Explanation of the Small-Firm Effect.” The Journal of Finance, Vol. 37 (09 1981), pp. 879–888.CrossRefGoogle Scholar
[13]Roll, Richard. “On Computing Mean Returns and the Small Firm Premium.” Journal of Financial Economics, Vol. 12 (11 1983), pp. 371–386.CrossRefGoogle Scholar
[14]Roll, Richard. “A Critique of the Capital Asset Pricing Theory's Tests: Part I.” Journal of Financial Economics, Vol. 4 (01 1977), pp. 120–176.CrossRefGoogle Scholar
[15]Roll, Richard. “Performance Evaluation and Benchmark Errors I/II.” Journal of Portfolio Management, Vol. 6 (Summer 1980/Fall 1981), pp. 5–12/17–22.CrossRefGoogle Scholar