Event Study Methodology: A New and Stochastically Flexible Approach

Posted: 16 Apr 1998

See all articles by Patrick L. Brockett

Patrick L. Brockett

University of Texas at Austin - Department of Information, Risk and Operations Management

Hwei-Mei Chen

University of Texas at Austin - Department of Finance

James R. Garven

Baylor University - Department of Finance, Insurance & Real Estate

Abstract

A number of articles have documented that the classical event study methodology exhibits a bias toward detecting "effects," irrespective of whether such effects actually exist. This paper addresses this bias by presenting a new methodology that explicitly incorporates stochastic behaviors of the market that are documented to exist and which are assumed away by the classical event study methodology. We apply our new methodology to an examination of the effect of the passage of California's Proposition 103 on the prices of insurance stocks. Proposition 103 was important regulatory event that previously has been investigated using classical event study techniques. We find that the passage of Proposition 103 did not significantly impact the returns on most insurance company stocks, a result that stands in stark contrast to other studies. Consequently, our study suggests that the application of the classical event study methodology, without checking the behavior of security returns for stochastic beta and GARCH effects, may very well cause researchers to draw inappropriate conclusions.

JEL Classification: G22

Suggested Citation

Brockett, Patrick L. and Chen, Hwei-Mei and Garven, James R., Event Study Methodology: A New and Stochastically Flexible Approach. Available at SSRN: https://ssrn.com/abstract=6741

Patrick L. Brockett

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States

Hwei-Mei Chen

University of Texas at Austin - Department of Finance

Red McCombs School of Business
Austin, TX 78712
United States
Not available (Phone)
Not available (Fax)

James R. Garven (Contact Author)

Baylor University - Department of Finance, Insurance & Real Estate ( email )

One Bear Place #98004
Baylor University
Waco, TX 76798-8004
United States

HOME PAGE: http://business.baylor.edu/directory/?id=James_Garven

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