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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.


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© 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.