Stock return outliers and beta estimation: The case of U.S. pharmaceutical companies

Alexandra K. Theodossiou and Panayiotis Theodossiou ()

Journal of International Financial Markets, Institutions and Money, 2014, vol. 30, issue C, 153-171

Abstract: Efficient estimation of the equity cost of operating public corporations is essential for a rational investment policy. Traditional OLS beta estimates of a single stock are known to suffer from violations of normality due to outliers – extreme returns caused by large, unpredictable company-specific events. We confirm the presence of an outliers-driven, often significant bias in OLS beta estimates by undertaking parallel estimates with a related method based on a mixed-return model that follows Huber's Robust M (HRM) estimator. We demonstrate that the OLS bias can be substantial even in a sample spanning 18 years of monthly observations.

Keywords: OLS estimation; Robust M estimation; Stock beta; Equity cost of capital; Pharmaceutical industry (search for similar items in EconPapers)
JEL-codes: G12 G31 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:30:y:2014:i:c:p:153-171

DOI: 10.1016/j.intfin.2014.02.002

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