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

 

Keith C. Brown

Larry J. Lockwood

Scott L. Lummer

 

Journal of Financial and Quantitative Analysis 20, 1985, pp. 315-334

 

 

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.

 

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