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Review of Quantitative Finance and Accounting

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01.02.2014 | Original Research

The influence of systematic risk factors and econometric adjustments in catastrophic event studies

verfasst von: Marie-Anne Cam, Vikash Ramiah

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 2/2014

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Abstract

Event study methodology is a well-accepted technique in finance. Although its application is popular, there have not been many critical assessments of this practice. For instance, in the estimation process, the researcher has to make a choice in terms of which asset pricing model to adopt when calculating expected returns. Different expected return models and financial econometrics adjustments may give rise to different results. This study explores seven commonly employed approaches. Using terrorist attacks and the subprime crisis as events, we calculate abnormal returns with different expected return techniques and then assess if there is a change in the result. Our evidence shows that the results vary according to the choice of the technique in estimating an expected return.

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Refer to Binder (1998), Palmon et al. (2009) and Bremer et al. (2011) for the recent publications on event study methodologies.

Other potential areas include natural disasters and it should be noted that recently Ramiah (2012b) used event study to capture the effects of the tsunami.

Sang and Oscar (1997) argues that the use of OLS with the market model is supported in the absence of clustered events.

Note that Eq. 6 cannot be fitted with a multiplicative dummy variable as it will be perfectly correlated with the additive dummy variable.

The variance of financial time series can be auto-correlated and has an autoregressive structure. With the introduction of the conditional variance, the GARCH(1,1) model captures the some of underlying ‘structure’ in time series data (Chappell and Eldridge 2000).

There is an on-going debate around what is the best asset pricing model, and it is beyond the scope of this study to participate in that discussion. Instead, we choose to show the discrepancy that may arise when using different asset pricing model.

The literature dealing with returns shows that they are not normally distributed primarily because returns tend to exhibit fat tails and positive skewness. Hence, other studies developed alternative GARCH models that will incorporate these moments (see Bali and Theodossiou 2007, 2008; Bali et al. 2008). A good topic for future research will be to assess how these models can affect our results.

Such an observation is in accordance with a new wave of studies that are questioning the use of econometrics in certain areas of finance. See Moosa (2011).

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Titel: The influence of systematic risk factors and econometric adjustments in catastrophic event studies
verfasst von: Marie-Anne Cam
Vikash Ramiah
Publikationsdatum: 01.02.2014
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 2/2014
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-012-0338-4

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