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Interpreting Differences Between Daily and Monthly Return Plots

Article Quant Q&A · Author: KDMS
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Summary

The document raises questions about why daily and monthly portfolio return plots derived from a data provider’s return index might differ. It describes calculating daily returns as consecutive index changes and monthly returns from month-end index values. It also asks whether daily outliers could explain discrepancies and whether unusually large monthly returns should be screened out when studying emerging-market equities.

The material offers no answers, plots, screening rules, or investigation of the underlying data, so it does not establish that outliers cause the differences or recommend a threshold for excluding observations. In practice, daily returns compound across the month, and month-end sampling, index revisions, missing observations, and data errors can affect comparisons. Any screening choice would need validation against source records and the research objective; the document leaves these checks unresolved.

Key ideas

  • Daily returns use consecutive index observations, while monthly returns use month-end observations.
  • Monthly returns reflect the compounded changes over the intervening daily periods.
  • Daily outliers could affect comparisons, but the document does not determine whether they explain the plotted differences.
  • The source asks about excluding extreme monthly observations but provides no screening recommendation.

Tags

EquitiesStatisticsBacktesting
Full text
# Why do these Monthly vs. daily plots differ?


# Why do these Monthly vs. daily plots differ?












I got my data from Thomson Reuters Datastream. As an Input for my plot i calculated daily Returns based on the Return-Index provided by datastream. Then i plotted the Monthly and the daily Returns.(Same color = same Portfolio, Blue = Green - Red) Can differences like these occur because of data outliers, that are visible in the daily Return-Index and not in the monthly?

Also: Are there any screening recommendations regarding Datastream equity Data ? Does it make sense to exclude monthly Returns >300% if you evaluate emerging markets ?

EDIT

for daily Returns : (RI(t)/ RI(t-1)) -1 monthly Returns: (RI(endofmonth t)/RI(endofmonth t-1)) -1

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.