Identifying and Treating Outliers in Finance

Financial Management, Forthcoming

64 Pages Posted: 16 Jun 2017 Last revised: 26 May 2020

See all articles by John C. Adams

John C. Adams

University of Texas at Arlington

Darren K. Hayunga

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Sattar Mansi

Virginia Polytechnic Institute & State University

David M. Reeb

National University of Singapore

Vincenzo Verardi

FUNDP - University of Namur. CRED

Date Written: December 14, 2018

Abstract

Outliers represent a fundamental challenge in empirical finance research. We investigate whether the routine techniques used in finance research to identify and treat outliers are appropriate for the data structures we observe in practice. Specifically, we propose a multivariate identification strategy that can effectively detect outliers. We also introduce an estimator that minimizes the bias outliers cause in both cross-sectional and panel regressions and provide outlier mitigation guidance. Using replications of four recently published studies in premier finance journals, we show how adjusting for multivariate outliers can lead to significantly different results.

Keywords: Replication, Research Design, Financial Data, Winzorize, Outliers, Robust Regression

JEL Classification: C31, C52, C87, G31, G32, G34, G38

Suggested Citation

Adams, John C. and Hayunga, Darren K. and Mansi, Sattar and Reeb, David M. and Verardi, Vincenzo, Identifying and Treating Outliers in Finance (December 14, 2018). Financial Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2986928 or http://dx.doi.org/10.2139/ssrn.2986928

John C. Adams

University of Texas at Arlington ( email )

Box 19449 UTA
Arlington, TX 76019
United States
904-476-2946 (Phone)

Darren K. Hayunga

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-1365 (Phone)

Sattar Mansi (Contact Author)

Virginia Polytechnic Institute & State University ( email )

David M. Reeb

National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://www.davidreeb.net

Vincenzo Verardi

FUNDP - University of Namur. CRED ( email )

8 Rempart de la Vierge
Namur, 5000
Belgium

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