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Time series and cross-section parameter stability in the market model: the implications for event studies


  • J. Andrew Coutts
  • Terence Mills
  • Jennifer Roberts


This paper investigates the time series and cross-section stability of parameter estimates from the single-index market model, using a UK data set relating to the security prices of parent companies, divesting in the form of a management buyout. A battery of tests of structural stability are undertaken, and we find that instability exists in the vast majority of the fitted models, both in relation to changes in the estimation period, and also to changes in the cross-section sample of firms included in this analysis. The implications of instability for the event study method are clearly illustrated by the construction of recursive cumulative abnormal return series. Our results suggest that when the market model is used within the event study framework, the quantitative results are extremely sensitive to the chosen estimation period and cross-section sample of firms. We suggest that if event studies continue to be pursued in the applied finance literature, it is essential that tests of parameter stability are incorporated into this framework. In addition, 'sensitivity analysis', that is, changes to the estimation period and cross-section sample employed, should also be investigated, and conclusions should be limited to interpreting the patterns of the cumulative abnormal returns.

Suggested Citation

  • J. Andrew Coutts & Terence Mills & Jennifer Roberts, 1997. "Time series and cross-section parameter stability in the market model: the implications for event studies," The European Journal of Finance, Taylor & Francis Journals, vol. 3(3), pages 243-259.
  • Handle: RePEc:taf:eurjfi:v:3:y:1997:i:3:p:243-259 DOI: 10.1080/135184797337462

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    References listed on IDEAS

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    Cited by:

    1. Robert L. Conn & Andy Cosh & Paul M. Guest & Alan Hughes, 2005. "The Impact on UK Acquirers of Domestic, Cross-border, Public and Private Acquisitions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5-6), pages 815-870.
    2. C Conn & A Cosh & P Guest & A Hughes, 2001. "Long-Run Share Performance of UK Firms Engaging in Cross-Border Acquisitions," Working Papers wp214, Centre for Business Research, University of Cambridge.


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