Tests for Abnormal Returns in the Presence of Event-Induced Cross-Sectional Correlation

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Abstract

We introduce a spatial autoregressive model for cross sectional correlation of abnormal returns. In the model the abnormal returns of firms in the same industry are correlated, whereas the abnormal returns of firms in different industries are uncorrelated. Tests for abnormal returns which are robust to event-induced cross sectional correlation are proposed. We apply our tests to US stock returns from Bear Stearns' collapse and Lehman Brothers' bankruptcy in 2008. We document evidence of event-induced cross sectional correlation. Simulations show that tests which estimate the cross sectional correlation from the event period have size close to the nominal level.
Original languageEnglish
Non-refereed scientific journalJournal of Financial Econometrics
Volume15
Issue number2
Pages (from-to)286-301
Number of pages16
ISSN1479-8409
DOIs
Publication statusPublished - 20.01.2017
MoE publication typeA1 Journal article - refereed

Keywords

  • 112 Statistics and probability
  • Cross sectional correlation
  • Spatial autoregressive model
  • 511 Economics
  • Abnormal return
  • Cross sectional correlation
  • Event study
  • Spatial autoregressive model
  • 512 Business and Management
  • Abnormal return
  • Cross sectional correlation
  • Event study
  • Spatial autoregressive model

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