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A Markov Switching Re-evaluation of Event-Study Methodology

In: Proceedings of COMPSTAT'2010

Author

Listed:
  • Rosella Castellano

    (Università di Macerata, Dip. di Istituzioni Economiche e Finanziarie)

  • Luisa Scaccia

    (Università di Macerata, Dip. di Istituzioni Economiche e Finanziarie)

Abstract

This paper reconsiders event-study methodology in light of evidences showing that Cumulative Abnormal Return (CAR) can result in misleading inferences about financial market efficiency and pre(post)-event behavior. In particular, CAR can be biased downward, due to the increased volatility on the event day and within event windows. We propose the use of Markov Switching Models to capture the effect of an event on security prices. The proposed methodology is applied to a set of 45 historical series on Credit Default Swap (CDS) quotes subject to multiple credit events, such as reviews for downgrading. Since CDSs provide insurance against the default of a particular company or sovereign entity, this study checks if market anticipates reviews for downgrading and evaluates the time period the announcements lag behind the market.

Suggested Citation

  • Rosella Castellano & Luisa Scaccia, 2010. "A Markov Switching Re-evaluation of Event-Study Methodology," Springer Books, in: Yves Lechevallier & Gilbert Saporta (ed.), Proceedings of COMPSTAT'2010, pages 429-436, Springer.
    • Handle: RePEc:spr:sprchp:978-3-7908-2604-3_41
    DOI: 10.1007/978-3-7908-2604-3_41
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