HAC Standard Errors and the Event Study Methodology: A Cautionary Note
6 Pages Posted: 4 Nov 2008 Last revised: 13 Sep 2010
Date Written: November 2, 2008
Abstract
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
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Alternative Methods for Robust Analysis in Event Study Applications
-
By Scott E. Hein and Peter Westfall
-
Conducting Event Studies on a Small Stock Exchange
By Jan Bartholdy, Dennis Olson, ...
-
On the Statistical Significance of Event Effects on Unsystematic Volatility
By Jimmy E. Hilliard and Robert Savickas
-
Conducting Event Studies With Asia-Pacific Security Market Data
By Charles J. Corrado and Cameron Truong
-
By George S. Ford and Audrey D. Kline