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HAC standard errors and the event study methodology: a cautionary note

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  • George Ford
  • John Jackson
  • Sarah Skinner

Abstract

In support of Fomby and Murfin's (2005) article published in this journal, we demonstrate empirically, rather than theoretically, the severe consequences of using Heteroscedasticity and Autocorrelation Consistent (HAC) SEs in regression-based financial event studies. Applying an event study to a recent merger, we show that the use of HAC SEs render misleading conclusions. Critical values for t-tests on the event dummy variables are about 15 times larger than the nominal values using only a year of daily return data. Even with samples of only 100 returns, critical values exceed nominal critical values by a factor of 10.

Suggested Citation

  • George Ford & John Jackson & Sarah Skinner, 2010. "HAC standard errors and the event study methodology: a cautionary note," Applied Economics Letters, Taylor & Francis Journals, vol. 17(12), pages 1153-1156.
  • Handle: RePEc:taf:apeclt:v:17:y:2010:i:12:p:1153-1156
    DOI: 10.1080/17446540902817601
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    References listed on IDEAS

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    1. Litvak, Kate, 2007. "The effect of the Sarbanes-Oxley act on non-US companies cross-listed in the US," Journal of Corporate Finance, Elsevier, vol. 13(2-3), pages 195-228, June.
    2. Miyajima, Hideaki & Yafeh, Yishay, 2007. "Japan's banking crisis: An event-study perspective," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2866-2885, September.
    3. Michael Cichello & Douglas Lamdin, 2006. "Event Studies and the Analysis of Antitrust," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 13(2), pages 229-245.
    4. Corrado, Charles J. & Zivney, Terry L., 1992. "The Specification and Power of the Sign Test in Event Study Hypothesis Tests Using Daily Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(3), pages 465-478, September.
    5. Thomas B. Fomby & Justin R. Murfin, 2005. "Inconsistency of HAC standard errors in event studies with i.i.d. errors," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(4), pages 239-242, July.
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    Cited by:

    1. Ralf Fendel & Frederik Neugebauer, 2018. "Country-Specific Euro Area Government Bond Yield Reactions to ECB’s Non-Standard Monetary Policy Announcements," WHU Working Paper Series - Economics Group 18-02, WHU - Otto Beisheim School of Management.

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