Aggregation and Dollar-Weighted Returns Issues

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Quarterly Journal of Finance and Accounting


This study is motivated by Dichev’s (2007) finding that buy-and-hold returns are significantly larger than dollar-weighted returns for the major stock market indexes and Hayley’s (2014) exposition that hindsight effects not poor timing are driving these results. In the case of domestic markets Keswani and Stolin (2008) demonstrate that Dichev’s findings are not statistically robust due to their sensitivity to the time period chosen. This study confirms Keswani and Stolin’s (2008) results and demonstrates that the relative magnitude of beginning and ending balances are the principal determinants of the differences in the estimated returns. In addition, it is shown that Hayley’s methodology used to break Dichev’s differences between geometric mean returns and dollar-weighted returns into hindsight and timing effects is flawed.