Do You Know What’s in Your Benchmark?

Abstract

The authors identify several problematic assumptions underlying the benchmark return methodology used by the Center for Research in Security Prices (CRSP), which practitioners and academics would be unlikely to know or mimic. In particular, CRSP includes non-common stock securities that most researchers exclude. CRSP does not follow a typical buy-and-hold methodology, and it excludes delisting returns. The authors discuss these issues and show how they can affect results in a number of research settings. The commonly used value-weighted, size-based benchmark returns, as well as all equally weighted daily benchmark returns, are particularly problematic.