Event Study Testing with Cross-Sectional Correlation of Abnormal Returns

Review of Financial Studies,Vol. 23, No. 11, pp. 3996-4025, 2010

Posted: 4 May 2011

See all articles by James W. Kolari

James W. Kolari

Texas A&M University - Department of Finance

Seppo Pynnonen

University of Vaasa, Department of Mathematics and Statistics

Date Written: November 2010

Abstract

This article examines the issue of cross-sectional correlation in event studies. When there is event-date clustering, we find that even relatively low cross-correlation among abnormal returns is serious in terms of over-rejecting the null hypothesis of zero average abnormal returns.We propose a new test statistic that modifies the t-statistic of Boehmer, Musumeci, and Poulsen (1991) to take into account cross-correlation and show that it performs well in competition with others, including the portfolio approach, which is less powerful than other alternatives under study. Also, our statistic is readily use-able to test multiple-day cumulative abnormal returns.

Keywords: event studies, cross-correlation, abnormal returns, event-date clustering

JEL Classification: G14, C10, C15

Suggested Citation

Kolari, James W. and Pynnonen, Seppo, Event Study Testing with Cross-Sectional Correlation of Abnormal Returns (November 2010). Review of Financial Studies,Vol. 23, No. 11, pp. 3996-4025, 2010 . Available at SSRN: https://ssrn.com/abstract=1830364

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Seppo Pynnonen

University of Vaasa, Department of Mathematics and Statistics ( email )

Wolffintie 34
65200 Vaasa
Finland
+358-21-449 8311 (Phone)

HOME PAGE: http://www.uva.fi/~sjp/

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,583
PlumX Metrics