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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
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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

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