The effect of market proxy rebalancing policies on detecting abnormal performance

In this paper, effects on the measured abnormal performance of test portfolios are compared against market proxies having the same or different rebalancing policies. Results show that the common practice of comparing buy‐and‐hold test portfolios with equally weighted market proxies produces lower Jensen [7] alphas and lower alpha t‐values. Comparing buy‐and‐hold test portfolios with value‐weighted market proxies produces higher portfolio betas and alphas, but lower alpha t‐values. Finally, comparing buy‐and‐hold test portfolios with buy‐and‐hold market proxies produces the most powerful tests of abnormal performance.