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A Simple, Consistent Estimator For Disturbance Components In Financial Models

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Author Info

  • LEVINSOHN, J.
  • MACKIE-MASON, J.K.

Abstract

Many recent papers have estimated components of the disturbance term in the "market model" of equity returns. In particular, several studies of regulatory changes and other policy events have decomposed the event effects in order to allow for heterogeneity across firms. In this paper we demonstrate that the econometric method applied in some papers yields biased and inconsistent estimates of the model parameters. We demonstrate the consistency of a simple and easily-implemented alternative method.

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Bibliographic Info

Paper provided by Stockholm - International Economic Studies in its series Papers with number 443.

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Length: 15 pages
Date of creation: 1989
Date of revision:
Handle: RePEc:fth:stocin:443

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Keywords: testing ; financial market ; enterprises ; equity;

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References

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  1. Douglas K. Pearce & V. Vance Roley, 1987. "Firm Characteristics, Unanticipated Inflation, and Stock Returns," NBER Working Papers 2366, National Bureau of Economic Research, Inc.
  2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  3. Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc.
  4. French, Kenneth R & Ruback, Richard S & Schwert, G William, 1983. "Effects of Nominal Contracting on Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 70-96, February.
  5. Borenstein, Severin & Zimmerman, Martin B, 1988. "Market Incentives for Safe Commercial Airline Operation," American Economic Review, American Economic Association, vol. 78(5), pages 913-35, December.
  6. Mitchell, Mark L & Maloney, Michael T, 1989. "Crisis in the Cockpit? The Role of Market Forces in Promoting Air Travel Safety," Journal of Law and Economics, University of Chicago Press, vol. 32(2), pages 329-55, October.
  7. Michael C. Jensen, 1972. "Capital Markets: Theory and Evidence," Bell Journal of Economics, The RAND Corporation, vol. 3(2), pages 357-398, Autumn.
  8. Grossman, Gene M & Levinsohn, James A, 1989. "Import Competition and the Stock Market Return to Capital," American Economic Review, American Economic Association, vol. 79(5), pages 1065-87, December.
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Cited by:
  1. Crabb, Peter R., 2002. "Multinational corporations and hedging exchange rate exposure," International Review of Economics & Finance, Elsevier, vol. 11(3), pages 299-314.
  2. Blank, Steven C., 1991. "The Robustness Of Single Index Models In Crop Markets: A Multiple Index Model Test," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 16(02), December.
  3. Gao, Ting, 2000. "Exchange rate movements and the profitability of U.S. multinationals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 117-134, February.

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