HAC Standard Errors and the Event Study Methodology: A Cautionary Note
6 Pages Posted: 4 Nov 2008 Last revised: 6 Dec 2010
Date Written: November 2, 2008
In support of Fomby and Murfin (2005), we demonstrate empirically, rather than theoretically, the severe consequences of using HAC standard errors in regression-based financial event studies. Applying an event study to a recent merger, we show that the use of HAC standard errors render misleading conclusions. Critical values for t-tests on the event dummy variables are about 15 times larger than the nominal values using only a year of daily return data. Even with samples of only 100 returns, critical values exceed nominal critical values by a factor of 10.
Keywords: Event Study, HAC, Heteroscedasticity Robust Standard Errors
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