Robust Regression Estimation Methods and Intercept Bias: A Capital Asset Pricing Model Application

McDonald, James B.; Michelfelder, Richard A.; Theodossiou, Panayiotis

Volume 13, Numbers 3 & 4 / September/December , Pages 155-321

Multinational Finance Journal, 2009, vol. 13, no. 3/4, pp. 293-321

James B. McDonald , Brigham Young University, USA Corresponding Author

Richard A. Michelfelder , Rutgers University, USA
Panayiotis Theodossiou , Cyprus University of Technology, Cyprus

Abstract:
Robust estimation techniques based on symmetric probability distributions are often substituted for OLS to obtain efficient regression parameters with thick-tail distributed data. The empirical, simulation and theoretical results in this paper show that with skewed distributed data, symmetric robust estimation techniques produce biased regression intercepts. This paper evaluates robust methods in estimating the capital asset pricing model and shows skewed stock returns data used with symmetric robust estimation techniques produce biased alphas. The results support the recommendation that robust estimation using the skewed generalized T family of distributions may be used to obtain more efficient and unbiased estimates with skewness.

Keywords : CAPM; quasi-maximum likelihood estimator; robust estimator; skewed generalized T
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