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Modelling normal returns in event studies: a model-selection approach and pilot study

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  • J. Cable
  • K. Holland
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    Abstract

    The choice of model of normal returns in event studies has been widely discussed in the literature. While researchers frequently continue to use an array of alternatives, there is currently some tendency to favour cruder but simpler mean- or market-adjusted returns models. This paper presents a general-to-specific model selection framework for testing the data admissibility of the principal models in current use. Results from a pilot study indicate a strong preliminary preference in favour of the regression-based models, with the market model generally outperforming the capital asset pricing model.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/135184799336993
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

    Volume (Year): 5 (1999)
    Issue (Month): 4 ()
    Pages: 331-341

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    Handle: RePEc:taf:eurjfi:v:5:y:1999:i:4:p:331-341

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    Related research

    Keywords: Abnormal Returns; Event Studies;

    References

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    1. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
    2. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
    3. James G. MacKinnon, 1990. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
    4. Kim, Dongcheol, 1995. " The Errors in the Variables Problem in the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 50(5), pages 1605-34, December.
    5. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    6. Ravi Jagannathan & Zhenyu Wang, 1996. "The conditional CAPM and the cross-section of expected returns," Staff Report 208, Federal Reserve Bank of Minneapolis.
    7. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
    8. J. Andrew Coutts & Terence Mills & Jennifer Roberts, 1995. "Misspecification of the market model: the implications for event studies," Applied Economics Letters, Taylor & Francis Journals, vol. 2(5), pages 163-165.
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    Cited by:
    1. Marcus Clements & Harminder Singh & Antonie Van Eekelen, 2007. "Trading in Target Stocks Before Takeover Announcements: An Analysis of Stock and Option Markets," Accounting, Finance, Financial Planning and Insurance Series 2007_20, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
    2. Silvio John Camilleri & Christopher J. Green, 2004. "The Impact of the Suspension of Opening and Closing Call," Finance 0411012, EconWPA.
    3. Silvio John Camilleri, 2005. "Can a Stock Index be Less Efficient than Underlying Shares? An Analysis Using Malta Stock Exchange Data," Finance 0507006, EconWPA.

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