Event Study Methodology: A New and Stochastically Flexible Approach
A number of articles have documented that the classical event study methodology exhibits a bias toward detecting "effects", irrespective of whether such effects actually exist. This paper addresses this bias by presenting a new methodology that explicitly incorporates stochastic behaviors of the market that are documented to exist and which are assumed away by the classical event study methodology. We apply our new methodology to an examination of the effect of the passage of California’s Proposition 103 on the prices of insurance stocks. Proposition 103 was important regulatory event that previously has been investigated using classical event study techniques. We find that the passage of Proposition 103 did not significantly impact the returns on most insurance company stocks, a result that stands in stark contrast to other studies. Consequently, our study suggests that the application of the classical event study methodology, without checking the behavior of security returns for stochastic beta and GARCH effects, may very well cause researchers to draw inappropriate conclusions.
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:|
|Contact details of provider:|| |
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.:
- J. David Cummins & Sharon Tennyson, 1992. "Controlling Automobile Insurance Costs," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 95-115, Spring.
- Fields, Joseph A. & Ghosh, Chinmoy & Kidwell, David S. & Klein, Linda S., 1990. "Wealth effects of regulatory reform *1: The reaction to California's proposition 103," Journal of Financial Economics, Elsevier, vol. 28(1-2), pages 233-250.
- Schwert, G William & Seguin, Paul J, 1990.
" Heteroskedasticity in Stock Returns,"
Journal of Finance,
American Finance Association, vol. 45(4), pages 1129-1155, September.
- Schwert, G.W. & Seguin, P.J., 1988. "Heteroskedasticity In Stock Returns," Papers bc_88-02, Rochester, Business - General.
- G. William Schwert & Paul J. Seguin, 1989. "Heteroskedasticity in Stock Returns," NBER Working Papers 2956, National Bureau of Economic Research, Inc.
- Frankfurter, George M. & McGoun, Elton G., 1993. "The event study: An industrial strength method," International Review of Financial Analysis, Elsevier, vol. 2(2), pages 121-141.
- Boehmer, Ekkehart & Masumeci, Jim & Poulsen, Annette B., 1991. "Event-study methodology under conditions of event-induced variance," Journal of Financial Economics, Elsevier, vol. 30(2), pages 253-272, December.
- Connolly, Robert A., 1989. "An Examination of the Robustness of the Weekend Effect," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(02), pages 133-169, June.
- Breusch, T S & Pagan, A R, 1979. "A Simple Test for Heteroscedasticity and Random Coefficient Variation," Econometrica, Econometric Society, vol. 47(5), pages 1287-1294, September.
- Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
- Asquith, Paul & Bruner, Robert F. & Mullins, David Jr., 1983. "The gains to bidding firms from merger," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 121-139, April. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:wop:riskar:003. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)
If references are entirely missing, you can add them using this form.