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A Simple, Consistent Estimator for Disturbance Components in Financial Models

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Author Info
James A. Levinsohn
Jeffrey K. MacKie-Mason

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0080.

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Date of creation: Oct 1989
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Handle: RePEc:nbr:nberte:0080

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Thomas W. Gilligan, 1986. "The Competitive Effects of Resale Price Maintenance," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 544-556, Winter. [Downloadable!] (restricted)
  2. Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Pearce, Douglas K & Roley, V Vance, 1988. " Firm Characteristics, Unanticipated Inflation, and Stock Returns," Journal of Finance, American Finance Association, vol. 43(4), pages 965-81, September. [Downloadable!] (restricted)
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  8. Mitchell, Mark L & Maloney, Michael T, 1989. "Crisis in the Cockpit? The Role of Market Forces in Promoting Air Travel Safety," Journal of Law & Economics, University of Chicago Press, vol. 32(2), pages 329-55, October.
  9. Michael C. Jensen, 1972. "Capital Markets: Theory and Evidence," Bell Journal of Economics, The RAND Corporation, vol. 3(2), pages 357-398, Autumn. [Downloadable!] (restricted)
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