Endogenous Events and Long Run Returns

54 Pages Posted: 31 Jan 2005  

S. Viswanathan

Duke University - Fuqua School of Business; Duke University - Department of Economics

Bin Wei

Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

We analyze event abnormal returns when returns predict events. We show that the expected abnormal return is negative for any fixed sample and this increases with the holding period of returns. However, we prove that if the number of events process is stationary, abnormal returns converge to zero asymptotically. This suggests that non-stationarity in the number of events process is needed to generate a large negative bias. We present simulation and small sample evidence for our results to show that sample size and stationarity property of the event process are important in assessing the magnitude of the small sample bias. We also show that the confidence intervals are larger when events are endogenous, and event returns are correlated, reinforcing the difficulty of inference in event studies.

Keywords: Event studies, long run returns, pseudo-market timing, financial econometrics, unit roots

JEL Classification: G14, G10, C10, C13

Suggested Citation

Viswanathan, S. and Wei, Bin, Endogenous Events and Long Run Returns (January 2005). EFA 2004 Maastricht Meetings Paper No. 4576. Available at SSRN: https://ssrn.com/abstract=520283 or http://dx.doi.org/10.2139/ssrn.520283

S. Viswanathan (Contact Author)

Duke University - Fuqua School of Business ( email )

Durham, NC 27708-0120
United States
919-660-7784 (Phone)
919-684-2818 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

Bin Wei

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/wei-bin.aspx

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