Biases in Decomposing Holding Period Portfolio Returns

32 Pages Posted: 20 Mar 2006

See all articles by Weimin Liu

Weimin Liu

Nottingham University Business School

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 2006

Abstract

A growing number of studies in finance decompose multiperiod portfolio returns into series of single period returns, using these to test asset pricing models or market efficiency or to evaluate the returns to investment strategies such as those based on momentum and value-growth. We provide a formal analysis of the decomposition method. Crucially, we argue and present empirical evidence that some methods researchers use involve portfolios that nobody would seriously consider ex ante, that transactions costs associated with such portfolios make them poor investment vehicles, and that they can lead to spurious statistical inferences.

Keywords: Decomposed buy-and-hold portfolio returns, rebalanced portfolio returns

JEL Classification: G14

Suggested Citation

Liu, Weimin and Strong, Norman Charles, Biases in Decomposing Holding Period Portfolio Returns (March 2006). Available at SSRN: https://ssrn.com/abstract=778646 or http://dx.doi.org/10.2139/ssrn.778646

Weimin Liu (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Norman Charles Strong

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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