Caveat Compounder: A Warning about Using the Daily CRSP Equal-Weighted Index to Compute Long-Run Excess Returns
Canina, Linda; Michaely, Roni; Thaler, Richard; Womack, Kent
This paper issues a warning that compounding daily returns of the Center for Research in Security Prices (CRSP) equal-weighted index can lead to surprisingly large biases. The differences between the monthly returns compounded from the daily tapes and the monthly CRSP equal-weighted indices is almost 0.43 percent per month, or 6 percent per year. This difference amounts to one-third of the average monthly return, and is large enough to reverse the conclusions of a paper using the daily tape to compute the return on the benchmark portfolio. We also investigate the sources of these biases and suggest several alternative strategies to avoid them.
compounding daily returns; Center for Research in Security Prices (CRSP); value-weighted (VW) index portfolio; monthly indices
Required Publisher Statement: © Wiley. Final version published as: Canina, L., Michaely, R., Thaler, R., & Womack, K. (1998). Caveat compounder: A warning about using the daily CRSP equal-weighted index to compute long-run excess returns. The Journal of Finance, 53(1). 403–416. doi:10.1111/0022-1082.165353 Reprinted with permission. All rights reserved.