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recently I am doing cross sectional regressions, and getting confused about missing returns.

Suppose we have 100 stocks, then we want to construct a value weighted return (or equal weighted return). But the point is that the weights should be created in t-1 since we shouldn't use information which are not revealed to investors. But firm "A Corp" may have missing return for period t, then it has return record afterwards. Do we simply drop the return of "A Corp" for period t then rebalance our weights for the rest 99 firms? If we do rebalance the weights, it simply implies that investors are using the fact "A Corp" will have missing returns, which should not be revealed to the investors in t-1. If we do not rebalance the weights, then it is equivalent to impose that we have zero return for "A Corp".

How do guys you deal with missing returns in this case? Many thanks!!

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The simple answer is that when you calculate the value weighted return at time $t$ all you really need is the return during time $t$ and the market-capitalization weight as of $t-1$. You can filter the securities to remove the missing ones (and others that you may remove for other reasons, e.g. too small or price too low), calculate weights based on the filtered data, and then take the weighted average to get the value-weighted return.

It becomes a little more complicated though depending on the reasons why the stocks are missing. If the stock return is missing because the company went bankrupt, then you need to make sure you are properly accounting for that. Another circumstance is when your universe is changing over time. You might need to throw in an additional filter to ensure that you're only considering stocks in the universe.

In other words, you might need to make some corrections depending on which value weighted return it is that you're trying to calculate.

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  • $\begingroup$ You mean to throw away the firms with occasional missing returns? For delisted firms, I can get delisted returns for period t and assuming the investors wouldn't hold it anymore afterwards. $\endgroup$
    – GrumpyJun
    Commented May 9, 2015 at 23:56
  • $\begingroup$ Yes. I'd be worried about delisted firms, but also firms that go bankrupt. $\endgroup$
    – John
    Commented May 10, 2015 at 0:18
  • $\begingroup$ Thank you! I think for delisted firms we can just assume after delisted return is realized, the investor would not hold that stock anymore. For bankrupted firm, maybe we just assume the return is zero if we can not compute the return with other information. $\endgroup$
    – GrumpyJun
    Commented May 10, 2015 at 9:29

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