Event Study Testing with Cross-Sectional Correlation Due to Partially Overlapping Event Windows

31 Pages Posted: 23 Apr 2018 Last revised: 24 Sep 2018

See all articles by James W. Kolari

James W. Kolari

Texas A&M University - Department of Finance

Bernd Pape

University of Vaasa - Department of Mathematics and Statistics

Seppo Pynnonen

University of Vaasa, Department of Mathematics and Statistics

Date Written: May 2, 2018

Abstract

This article re-examines the issue of cross-sectional correlation. Kolari and Pynnonen (2010) find that, in the case of event-date clustering with the same event window for all firms, relatively low cross-sectional correlation among abnormal returns can seriously bias standard tests to over-reject the null hypothesis of zero average abnormal return. We generalize their approach to take into account windows that partially overlap in calendar time. For this purpose we modify their test statistics to adjust for the average percentage of overlaps in event windows. Also, we report empirical evidence on the application of the proposed test statistics to actual event studies.

Keywords: Abnormal Returns; Event Day Clustering; Clustering Robust Standard Errors; Cross-Sectional Correlation

JEL Classification: G14, C10, C15

Suggested Citation

Kolari, James W. and Pape, Bernd and Pynnonen, Seppo, Event Study Testing with Cross-Sectional Correlation Due to Partially Overlapping Event Windows (May 2, 2018). Mays Business School Research Paper No. 3167271. Available at SSRN: https://ssrn.com/abstract=3167271 or http://dx.doi.org/10.2139/ssrn.3167271

James W. Kolari

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)

Bernd Pape

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

Wolffintie 34
65200 Vaasa
Finland

Seppo Pynnonen (Contact Author)

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/

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