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

Niklas Ahlgren; Jan Antell

doi:10.1093/jjfinec/nbw012

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 language	English
Non-refereed scientific journal	Journal of Financial Econometrics
Volume	15
Issue number	2
Pages (from-to)	286-301
Number of pages	16
ISSN	1479-8409
DOIs	https://doi.org/10.1093/jjfinec/nbw012
Publication status	Published - 20.01.2017
MoE publication type	A1 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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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.",

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

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