Strong and weak cross-sectional dependence in factor models for returns in event studies

Research output: Chapter in Book/Report/Conference proceedingConference contributionScientific

Abstract

Cross-sectional dependence in abnormal returns is investigated using a recently introduced exponent of cross-sectional dependence. The abnormal return is defined as the actual return minus the normal return predicted by a factor model. The factor model is valid for computing abnormal returns provided there is no remaining factor structure (strong cross-sectional dependence), so that abnormal returns are at most weakly cross-sectionally dependent. We compare five commonly used factor models for returns. The models are the market model, three-factor model, three-factor model extended with momentum factor, five-factor model and five-factor model extended with momentum factor. The models are fitted to US stock returns from Bear Stearns’ collapse and Lehman Brothers’ bankruptcy in 2008. These data provide evidence that the cross-sectional dependence in returns due to common factors other than the market factor is strong. Contrary to recommendations in the literature to use the market model, we propose the use of multi-factor models to compute abnormal returns in event studies.
Original languageEnglish
Title of host publicationProgramme and Abstracts CFE-CMSTATISTICS 2017 : 11th International Conference on Computational and Financial Econometrics (CFE 2017)
Number of pages1
Volume11
Place of PublicationLondon
PublisherECOSTA ECONOMETRICS AND STATISTICS
Publication date28.11.2017
Pages53-53
ISBN (Print)978-9963-2227-4-2
Publication statusPublished - 28.11.2017
MoE publication typeB3 Article in conference proceedings
Event11th International Conference on Computational and Financial Econometrics (CFE) - Senate House, University of London, London, United Kingdom
Duration: 16.12.201718.12.2017
Conference number: 11
http://www.cfenetwork.org/CFE2017/

Keywords

  • 112 Statistics and probability

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    Ahlgren, N., & Antell, J. (2017). Strong and weak cross-sectional dependence in factor models for returns in event studies. In Programme and Abstracts CFE-CMSTATISTICS 2017: 11th International Conference on Computational and Financial Econometrics (CFE 2017) (Vol. 11, pp. 53-53). ECOSTA ECONOMETRICS AND STATISTICS. http://www.cfenetwork.org/CFE2017/docs/BoA%20CFE-CMStatistics%202017.pdf?20171128000235