Rossi, Francesco (2011): U.K. cross-sectional equity data: do not trust the dataset! The case for robust investability filters.
Download (402kB) | Preview
We propose a novel approach to cross-sectional equities sample selection, derived from best market practice in index construction and focused on investability. Using the U.K. market as a template, we first demonstrate how the popular Datastream dataset is plagued by data deficiencies that would surely invalidate statistical inferences, and that are not addressed by commonly used filters. We show the benefits and need for a supplementary data source. We then develop robust investability filters to ensure statistical results from cross-sectional analysis are economically meaningful, an issue overlooked by most studies on cross-sectional risk pricing
|Item Type:||MPRA Paper|
|Original Title:||U.K. cross-sectional equity data: do not trust the dataset! The case for robust investability filters|
|English Title:||U.K. cross-sectional equity data: do not trust the dataset! The case for robust investability filters|
|Keywords:||cross-sectional equities; idiosyncratic risk; U.K. equities; asset pricing; investability; Datastream; Bloomberg; sample selection; turnover; volume; equities; equity;|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
G - Financial Economics > G1 - General Financial Markets > G10 - General
|Depositing User:||Francesco Rossi|
|Date Deposited:||23 Apr 2012 13:39|
|Last Modified:||20 Sep 2016 16:11|
Ang, Andrew, Robert J. Hodrick, Yuhang Xing, and Xiaoyan Zhang, 2009, High idiosyncratic volatility and low returns: International and further U.S. Evidence, Journal of Financial Economics 91, 1-23.
Ang, Andrew, Robert J. Hodrick, Xing Yuhang, and Zhang Xiaoyan, 2006, The cross-section of volatility and expected returns, Journal of Finance 61, 259-299.
Arena, Matteo P., K. S. Haggard, and Xuemin Sterling Yan, 2008, Price momentum and idiosyncratic volatility, Financial Review 43, 159-190.
Bali, Turan G., Nusret Cakici, Zhang Zhe, and Y. A. N. Xuemin, 2005, Does idiosyncratic risk really matter?, Journal of Finance 60, 905-929.
Bartram, Söhnke M., Gregory Brown and Rene M. Stulz, 2009, Why Do Foreign Firms Have Less Idiosyncratic Risk than U.S. Firms?, Working Paper.
Basu, Devraj, and Lionel Martellini, 2007, Total volatility and the cross section of expected stock returns, EFMA Working Paper, Draft.
Bekaert, Geert, Campbell R. Harvey and Christian Lundblad, 2007, Liquidity and Expected Returns: Lessons from Emerging Markets, Review of Financial Studies 20, 1783-1831.
Bekaert, Geert, Robert J. Hodrick, and Xiaoyan Zhang, 2008, Is there a trend in idiosyncratic volatility?, Working Paper.
Boyer, Brian H., Todd Mitton, and Keith Vorkink, 2008, Expected idiosyncratic skewness, Working Paper.
Brandt, Michael W., Alon Brav, John R. Graham and Alok Kumar, 2010, The Idiosyncratic Volatility Puzzle: Time Trend or Speculative Episodes?, Review of Financial Studies 23, 863-899.
Brockman, Paul, Maria Gabriela Schutte and Wayne Yu, 2009, Is Idiosyncratic Risk Priced? The International Evidence, Working Paper.
Campbell, John Y., Martin Lettau, Burton G. Malkiel, and Xu Yexiao, 2001, Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk, Journal of Finance 56, 1-43.
Carhart, Mark M., 1997, On persistence in mutual fund performance, Journal of Finance 52, 57-82.
Chen, Joseph S., 2002, Intertemporal capm and the cross-section of stock returns, SSRN eLibrary.
Chua, Choong Tze, Jeremy Goh, and Zhe Zhang, 2006, Idiosyncratic volatility matters for the cross-section of returns - in more ways than one!, Working Paper.
Cremers, K. J. Martijn, and Jianping Mei, 2002, A new approach to the duo-factor-model of return and volume, New York University, Working Paper.
Cremers, K. J. Martijn, and Jianping Mei, 2007, Turning over turnover, The Review of Financial Studies 20, 1749.
Epstein, Larry G., and Martin Schneider, 2008, Ambiguity, information quality, and asset pricing, Journal of Finance 63, 197-228.
Fama, Eugene F. 1968a, Risk, Return and Equilibrium, Center for Mathematical Studies in Business and Economics, University of Chicago, Report No. 6831.
Fama, Eugene F., 1968b, Risk, Return, and Equilibrium: Some Clarifying Comment, Journal of Finance 52, 29-40.
Fama, Eugene F., and Kenneth R. French, 1992. The cross-section of expected stock returns. Journal of Finance 48, 427–465.
Fama, Eugene F., and Kenneth R. French, 2008, Dissecting anomalies, Journal of Finance 63, 1653-1678.
Frazzini, A., and L. Marsh, 2003, “Idiosyncratic Volatility in the US and UK Equity Markets,” Unpublished Working Paper, Yale University.
French, K., G. Schwert, and R. Stambaugh, 1987, Expected stock returns and volatility, Journal of Financial Economics.
Fu, Fangjian, 2009, Idiosyncratic risk and the cross-section of expected stock returns, Journal of Financial Economics 91, 24-37.
Garcia, René, Daniel Mantilla-Garcia and Lionel Martellini, 2009, Idiosyncratic Risk and the Cross-Section of Realized Returns: Reconciling the Aggregate Returns, Working Paper.
Guo, Hui and Robert Savickas, 2008, Average Idiosyncratic Volatility in G7 Countries, Review of Financial Studies 21, 1259-1296.
Guo, Hui, and Robert Savickas, 2004, Idiosyncratic volatility, stock market volatility, and expected stock returns, Working Paper.
Hamao, Yasushi, Jianping Mei, and Yexiao Xu, 2003, Idiosyncratic risk and the creative destruction in Japan, NBER Working Paper.
He, Zhongzhi, Sahn-Wook Huh and Bong-Soo Lee, 2008, Is Dynamic Factors and Asset Pricing, Working Paper.
Ince, Ozgur S., and Burt R. Porter, 2006, Individual equity return data from Thomson Datastream: handle with care!, Journal of Financial Research 29, 1475-6803.
Jacobs, Kris, and Kevin Q. Wang, 2004, Idiosyncratic consumption risk and the cross section of asset returns, Journal of Finance 59, 2211-2252.
Jegadeesh, Narasimhan, and Sheridan Titman, 2001, Profitability of momentum strategies: An evaluation of alternative explanations, Journal of Finance 56, 699-720.
Jensen, Michael C., Fischer Black and Myron Scholes, 1972, The Capital Asset Pricing Model: Some Empirical Tests, Studies in the theory of capital markets 81, 79-121.
Lehmann, Bruce N., 1986, Residual risk revisited, NBER Working Paper.
Lehmann, Bruce N., 1992, Empirical testing of asset pricing models, NBER Working Paper.
Li, Xiafei, Joëlle Miffre, Chris Brooks, and Niall O'Sullivan, 2008, Momentum profits and time-varying unsystematic risk, Journal of Banking & Finance 32, 541-558.
Malkiel, B. G., and Yexiao Xu, 2002, Idiosyncratic risk and security returns, Working Paper.
Malkiel, Burton G., and Yexiao Xu, 1997, Risk and return revisited, Journal of Portfolio Management 23, 9.
Merton, Robert C., 1987, A simple model of capital market equilibrium with incomplete information, Journal of Finance 42, 483-510.
Ruan, Tony, Quian Sun an Yexiao Xu, 2010, When Does Idiosyncratic Risk Really Matter?, Working Paper.
Spiegel, Matthew, and Xiatong Wang, 2005, Cross-sectional variation in stock returns: Liquidity and idiosyncratic risk, Yale School of Management, Working Paper.
Wei, Steven X., and Chu Zhang, 2005, Idiosyncratic risk does not matter: A re-examination of the relationship between average returns and average volatilities, Journal of Banking & Finance 29, 603–621
Xu, Yexiao, and Burton G. Malkiel, 2003, Investigating the behavior of idiosyncratic volatility, Journal of Business 76, 613-644.