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A Bayesian Approach to Event Studies for Securities Litigation

Author

Listed:
  • Jonah B. Gelbach
  • Jenny R. Hawkins

Abstract

We propose a Bayesian method for econometric event studies commonly usedin U.S. securities litigation. We show that our approach may be based on the Bayes factor, which has a simple form when inference is based on the empirical distribution function of abnormal returns; it also avoids problems related to nonnormality of abnormal returns. We use data from litigation related to alleged fraud by the Apollo Education Group (University of Phoenix's parent) to illustrate the method. Results are similar to frequentist hypothesis testing with a large event-date effect, but they can be importantly different with a small or moderate effect.

Suggested Citation

  • Jonah B. Gelbach & Jenny R. Hawkins, 2020. "A Bayesian Approach to Event Studies for Securities Litigation," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 176(1), pages 86-111.
    • Handle: RePEc:mhr:jinste:urn:doi:10.1628/jite-2020-0012
    DOI: 10.1628/jite-2020-0012
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    More about this item

    Keywords

    Bayesian estimation; securities litigation; event studies; financial econometrics;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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