Short‐Horizon Event Study Estimation with a STAR Model and Real Contaminated Events

Andreou, P.; Louca, C.; Savva, C.S.

doi:10.1007/s11156-015-0515-3

Short‐Horizon Event Study Estimation with a STAR Model and Real Contaminated Events

Andreou, P.; Louca, C.; Savva, C.S.

Authors

Professor Panayiotis Andreou panayiotis.andreou@durham.ac.uk
Professor

C. Louca

C.S. Savva

Abstract

We propose a test statistic for nonzero mean abnormal returns based on a Smooth Transition Auto Regressive (STAR) model specification. Estimation of STAR takes into account the probability of contaminated events that could otherwise bias the parameters of the market model and thus the specification and power of the test statistic. Using both simulated and real stock returns data from mergers and acquisitions, we find that the STAR test statistic is robust to contaminated events occurring in the estimation window and in the presence of event-induced increase in return variance. Under the STAR test statistic the true null hypothesis is rejected at appropriate levels. Moreover, it exhibits the highest levels of power when compared with other test statistics that are widely and routinely applied in short-horizon event studies.

Citation

Andreou, P., Louca, C., & Savva, C. (2016). Short‐Horizon Event Study Estimation with a STAR Model and Real Contaminated Events. Review of Quantitative Finance and Accounting, 47(3), 673-697. https://doi.org/10.1007/s11156-015-0515-3

Journal Article Type	Article
Acceptance Date	Apr 23, 2015
Online Publication Date	May 7, 2015
Publication Date	Oct 1, 2016
Deposit Date	Jan 4, 2016
Publicly Available Date	May 7, 2016
Journal	Review of Quantitative Finance and Accounting
Print ISSN	0924-865X
Electronic ISSN	1573-7179
Publisher	Springer
Peer Reviewed	Peer Reviewed
Volume	47
Issue	3
Pages	673-697
DOI	https://doi.org/10.1007/s11156-015-0515-3
Keywords	Event studies, Test statistics, Contaminated events, Markov switching regression model, Smooth Transition Auto Regressive model.
Public URL	https://durham-repository.worktribe.com/output/1393060