Abstract:

In this study, the effect of using price returns instead of total returns, contrary to the assumptions of finance theory, on the findings of the carried analysis while studying topics such as asset pricing models and portfolio selection is examined. The data set of the study consists of daily data over the 2006:1-2020:12 period for the national 100 index and six sub-indices in Borsa Istanbul. The results reveal that the use of price returns causes a bias in portfolio selection in favour of assets with low dividend yields and against those with high dividend yields. It has been observed that the share of the price return in the total return is also effective on the estimated betas. In addition, in terms of asset pricing models, it is demonstrated that the use of price returns may lead to erroneous inferences in the tests for the validity of these models. An equally important result is that the sector betas change considerably over time. It is suggested that this phenomenon should be taken into account in future studies. As well as the studies in the field of financial economics, the results of our study are also important for the studies that examine the relevance of accounting information using stock returns and/or cost of capital.

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