On the Statistical Significance of Event Effects on Unsystematic Volatility

Abstract

The methodology for determining the statistical significance of the impact of a certain event (stock split, corporate restructuring, change in regulation, etc.) on the unsystematic volatility of asset returns is developed. The measures of such an impact and corresponding test statistics are derived. Simulations show that the suggested tests reject the true null hypothesis of no impact on volatility at appropriate levels, while the rejection rates of a false null hypothesis increase with the magnitude of the effect. An application of the methodology to corporate spin--offs reveals statistically significant and long--lasting increases in the unsystematic volatility of parent companies' returns.

JEL Classification: G14, G34, C10