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Decomposing Excess Returns in Stochastic Linear Models

Author

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  • Lin, Carl

    (Bucknell University)

Abstract

We present a theorem helpful in estimating the mean and variance of a linear function with arbitrary multivariate randomness in its coefficients and variables. We derive a generalized decomposition result from two random linear functions in which the result can be applied to most models using event study analysis. Taking the 1989 minimum wage hike as an example, we found that the apparent lack of an effect is a consequence of two off-setting forces: 1) a negative effect arising from firm-specific traits and 2) a positive effect arising from market performance. In sum, we bring to the analysis a method that helps provide additional insights and can be applied to much of the work using event study.

Suggested Citation

  • Lin, Carl, 2011. "Decomposing Excess Returns in Stochastic Linear Models," IZA Discussion Papers 6237, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp6237
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    References listed on IDEAS

    as
    1. Carl Lin, 2011. "Give me your wired and your highly skilled: measuring the impact of immigration policy on employers and shareholders," Working Papers 2011/17, Institut d'Economia de Barcelona (IEB).
    2. Schwert, G William, 1981. "Using Financial Data to Measure Effects of Regulation," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 121-158, April.
    3. Lin, Carl, 2011. "Give Me Your Wired and Your Highly Skilled: Measuring the Impact of Immigration Policy on Employers and Shareholders," IZA Discussion Papers 5754, Institute for the Study of Labor (IZA).
    4. Gerald G. Brown & Herbert C. Rutemiller, 1977. "Means and Variances of Stochastic Vector Products with Applications to Random Linear Models," Management Science, INFORMS, vol. 24(2), pages 210-216, October.
    5. Yun, Myeong-Su, 2004. "Decomposing differences in the first moment," Economics Letters, Elsevier, vol. 82(2), pages 275-280, February.
    6. Alan S. Blinder, 1973. "Wage Discrimination: Reduced Form and Structural Estimates," Journal of Human Resources, University of Wisconsin Press, vol. 8(4), pages 436-455.
    7. Daniel A. Powers & Hirotoshi Yoshioka & Myeong-Su Yun, 2011. "mvdcmp: Multivariate decomposition for nonlinear response models," Stata Journal, StataCorp LLC, vol. 11(4), pages 556-576, December.
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    Cited by:

    1. Lin, Carl, 2012. "Less Myth, More Measurement: Decomposing Excess Returns from the 1989 Minimum Wage Hike," IZA Discussion Papers 6269, IZA Network @ LISER.

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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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