Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-21T23:47:16.875Z Has data issue: false hasContentIssue false
  • English
  • Français

An Examination of Event Dependency and Structural Change in Security Pricing Models

Published online by Cambridge University Press:  06 April 2009

Keith C. Brown ,
Larry J. Lockwood  and
Scott L. Lummer
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper considers two aspects of the tendency for systematic risk to change during the period surrounding a firm-specific event. First, a statistic allowing for heteroskedasticity is presented as a means of more precisely testing for the incidence of structural change in the market model. Secondly, the bias resulting from the imposition of a single, arbitrary event period on every firm in a market efficiency study is formally demonstrated. Using a sample based upon stock splits, the switching regression technique of Quandt is then adapted to show that event intervals are more appropriately considered on a case-by-case basis. A comparison of alternative residual measures illustrates these procedures.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 20 , Issue 3 , September 1985 , pp. 315 - 334
Copyright
Copyright © School of Business Administration, University of Washington 1985

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Ball, R., and Brown, P.. “An Empirical Evaluation of Accounting Income Numbers.” Journal of Accounting Research, Vol. 6 (Autumn 1968), pp. 159–178.CrossRefGoogle Scholar
[2]Bar-Yosef, S., and Brown, L. D.. “A Reexamination of Stock Splits Using Moving Betas.” Journal of Finance, Vol. 32 (09 1977), pp. 1069–1080.CrossRefGoogle Scholar
[3]Belsley, D. A. “On the Determination of Systematic Parameter Variation in the Linear Regression Model.” Annals of Economic and Social Measurement, Vol. 2 (10 1973), pp. 487–494.Google Scholar
[4]Bey, R. P., and Pinches, G. E.. “Additional Evidence of Heteroskedasticity in the Market Model.” Journal of Financial and Quantitative Analysis, Vol. 15 (06 1980), pp. 299–322.CrossRefGoogle Scholar
[5]Boness, J.; Chen, A.; and Jatusipitak, S.. “Investigations of Non-Stationarity in Prices.” Journal of Business, Vol. 47 (10 1974) pp. 518–537.CrossRefGoogle Scholar
[6]Brown, R.; Durbin, J. and Evans, J.. “Techniques for Testing the Constancy of Regression Relationships over Time.” Journal of the Royal Statistical Society, Vol. 37, No. 2 (1975) pp. 149–163.Google Scholar
[7]Brown, S. J., and Warner, J. B.. “Measuring Security Price Performance.” Journal of Financial Economics, Vol. 8 (09 1980), pp. 205–258.CrossRefGoogle Scholar
[8]Chen, S., and Keown, A. J.. “Risk Decomposition and Portfolio Diversification when Beta Is Nonstationary: A Note.” Journal of Finance, Vol. 36 (09 1981), pp. 941–947.CrossRefGoogle Scholar
[9]Chow, G. C. “Tests of Equality between Sets of Co-Efficients in Two Linear Regressions.” Econometrica, Vol. 28 (07 1960), pp. 591–605.CrossRefGoogle Scholar
[10]Fabozzi, F. J., and Francis, J. C.. “Stability Tests for Alphas and Betas over Bull and Bear Market Conditions.” Journal of Finance, Vol. 32 (09 1977), pp. 1093–1099.CrossRefGoogle Scholar
[11]Fama, E. F.Foundations of Finance. New York: Basic Books (1976).Google Scholar
[12]Fama, E. F.; Fisher, L.; Jensen, M. C. and Roll, R.. “The Adjustment of Stock Prices to New Information.” International Economic Review, Vol. 10 (02 1969), pp. 1–21.CrossRefGoogle Scholar
[13]Giaccotto, C., and Ali, M.. “Optimum Distribution-Free Tests and Further Evidence of Heteroskedasticity in the Market Model.” Journal of Finance, Vol. 37 (12 1982), pp. 1247–1257.Google Scholar
[14]Goldfeld, S., and Quandt, R.. “The Estimation of Structural Shifts by Switching Regressions.” Annals of Economic and Social Measurement, Vol. 2 (10 1973), pp. 475–485.Google Scholar
[15]Gupta, S., and Kadiyala, K. R.. “Tests for Pooling Cross-Sectional Data in the Presence of Heteroskedasticity.” Krannert Graduate School of Management Institute Paper No. 713, Purdue University (11 1979).Google Scholar
[16]Hsu, D. A. “Test for Variance Shift to an Unknown Time Point.” Journal of the Royal Statistical Society, Series C, Vol. 26 (12 1977), pp. 279–284.Google Scholar
[17]Hsu, D. A. “A Bayesian Robust Detection of Shift in the Risk Structure of Stock Market Returns.” Journal of the American Statistical Association, Vol. 77 (03 1982), pp. 29–39.CrossRefGoogle Scholar
[18]Hsu, D. A. “Robust Inferences for Structural Shift in Regression Models.” Journal of Econometrics, Vol. 10 (05 1982), pp. 89–107.CrossRefGoogle Scholar
[19]Jayatissa, W. A. “Tests of Equality between Sets of Co-efficients in Two Linear Regressions when Disturbance Variances Are Unequal.” Econometrica, Vol. 45 (07 1977), pp. 1291–1292.CrossRefGoogle Scholar
[20]Kon, S. J., and Jen, F. C.. “Estimation of Time-Varying Systematic Risk and Performance for Mutual Fund Portfolios: An Application of Switching Regression.” Journal of Finance, Vol. 33 (05 1978), pp. 457–475.Google Scholar
[21]Kon, S. J., and Lau, W. P.. “Specification Tests for Portfolio Regression Parameter Stationarity and the Implications for Empirical Research.” Journal of Finance, Vol. 34 (05 1979), pp. 451–465.Google Scholar
[22]Larcker, D. F.; Gordon, L. A. and Pinches, G. E.. “Testing for Market Efficiency: A Comparison of the Cumulative Average Residual Methodology and Intervention Analysis.” Journal of Financial and Quantitative Analysis, Vol. 15 (06 1980), pp. 267–287.CrossRefGoogle Scholar
[23]Mandelker, G. “Risk and Return: The Case of Merging Firms.” Journal of Financial Economics, Vol. 1 (12 1974), pp. 303–335.CrossRefGoogle Scholar
[24]Quandt, R. “The Estimation of the Parameters of a Linear Regression System Obeying Two Separate Regimes.” Journal of the American Statistical Association, Vol. 53 (12 1958), pp. 873–880.CrossRefGoogle Scholar
[25]Quandt, R. “A New Approach to Estimating Switching Regressions.” Journal of the American Statistical Association, Vol. 67 (06 1972), pp. 306–310.CrossRefGoogle Scholar
[26]Schmidt, P., and Sickles, R.. “Some Further Evidence on the Use of the Chow Test under Heteroskedasticity.” Econometrica, Vol. 45 (07 1977), pp. 1293–1298.CrossRefGoogle Scholar
[27]Toyoda, T. “Use of the Chow Test under Heteroskedasticity.” Econometrica, Vol. 42 (05 1974), pp. 601–608.CrossRefGoogle Scholar
[28]Zellner, A. “An Efficient Method of Estimating Seemingly Unrelated Regressions and Tests for Aggregation Bias.” Journal of the American Statistical Association, Vol. 47 (06 1962), pp. 348–368.CrossRefGoogle Scholar