Journal of Finance Vol. 53 No. 1 1998
Caveat Compounder: A Warning about Using the Daily CRSP Equal-Weighted Index to Compute Long-Run Excess Returns
Abstract
This paper issues a warning that compounding daily returns of the Center for Research in Security Prices (CRSP) equal-weighted index can lead to surprisingly large biases. The differences between the monthly returns compounded from the daily tapes and the monthly CRSP equal-weighted indices is almost 0.43 percent per month, or 6 percent per year. This difference amounts to one-third of the average monthly return, and is large enough to reverse the conclusions of a paper using the daily tape to compute the return on the benchmark portfolio. We also investigate the sources of these biases and suggest several alternative strategies to avoid them.
- DOI
- https://doi-org.proxy.lib.uiowa.edu/10.1111/0022-1082.165353
- Volume
- 53
- Issue
- 1
- Pages
- 403-416
- Sources
- bibtex:phds-export.bib