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Rev Fin 1994; 7:61-96
© 1994 the Society for Financial Studies

Article

Cross-holdings: estimation issues, biases, and distortions

M Fedeniaz, JE Hodder and AJ Triantis
School of Business, University of Wisconsin-Madison, 975 University Avenue, Madison, WI 53706, USA
z Corresponding author

Abstract

Cross-bolding occurs when listed corporations own securities issued by other corporations. We analyze the effect of cross-holdings on market capitalization and return measures as well as implications for econometric testing of asset pricing theories. We show that cross-holdings generally distort standard market return and risk measures. The magnitudes of such distortions are calculated for simulated economies by using a variety of crossholding patterns. In addition, cross-holdings are shown to induce non-stationarity in the covariance matrix of security returns. We examine the effect of this nonstationarity for estimating efficient frontiers and factor structures. We also discuss the implications for risk-return estimates in equilibrium asset pricing models.


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