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An Examination of Event Dependency and Structural Change in Security Pricing Models

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  • Brown, Keith C.
  • Lockwood, Larry J.
  • Lummer, Scott L.

Abstract

This paper considers two aspects of the tendency for systematic risk to change during the period surrounding a firm-specific event. First, a statistic allowing for heteroskedasticity is presented as a means of more precisely testing for the incidence of structural change in the market model. Secondly, the bias resulting from the imposition of a single, arbitrary event period on every firm in a market efficiency study is formally demonstrated. Using a sample based upon stock splits, the switching regression technique of Quandt is then adapted to show that event intervals are more appropriately considered on a case-by-case basis. A comparison of alternative residual measures illustrates these procedures.

Suggested Citation

  • Brown, Keith C. & Lockwood, Larry J. & Lummer, Scott L., 1985. "An Examination of Event Dependency and Structural Change in Security Pricing Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(3), pages 315-334, September.
    • Handle: RePEc:cup:jfinqa:v:20:y:1985:i:03:p:315-334_01
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    Cited by:

    1. Cyree, Ken B & DeGennaro, Ramon P, 2002. "A Generalized Method for Detecting Abnormal Returns and Changes in Systematic Risk," Review of Quantitative Finance and Accounting, Springer, vol. 19(4), pages 399-416, December.
    2. Burnett, John E. & Carroll, Carolyn & Thistle, Paul, 1995. "Implications of multiple structural changes in event studies," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(4), pages 467-480.

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