CAPM-alpha estimation with robust regression vs. linear regression
DOI:
https://doi.org/10.24275/uam/azc/dcsh/ae/2022v38n97/SamaniegoKeywords:
Appraisal, CAPM, robust regression, portfolio selectionAbstract
Ordinary least squares (OLS) regression analysis seeks to find the relationship between variables under certain assumptions. If these assumptions are not met, the results are said to be not robust. Robust regression by optimization seeks to meet these assumptions. Both regression methods are contrasted using the following premise: past performance (CAPM-alpha) is a good estimator of future performance. Similar results were found for the study period, with linear regression outperforming robust regression. Empirically, active portfolios using the Treynor-Black methodology between 2000-2020 are used to contrast the regression methods.
JEL Classification: G11; G17; C61.
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