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«Citation for published item: Andreou, P. C., Louca, C. and Savva, C.S. Short-horizon event study estimation with a STAR model and real contaminated ...»

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This result is also supported by previous studies, see for example Aktas et. al. (2007a). The BMP model is a good choice to work with in the case of contaminated events under the simulated data environment. In the real data setting, however, BMP performs reasonably well but not as good as the regime-switching family and in particular when compared to the STAR event study test statistic.

The least powerful tests are BETA-1 and GARCH. When using simulated data, these two tests have similar rejection rates and power regardless of the presence of contaminating events. On the other hand, evidence from using the real data suggests that in the presence of event-induced increase in variance the rejection rates of these tests as well as their power are severely reduced making these tests the less preferable.

Comparing the real returns results under different extreme market conditions we observe differences in the power of the test statistics especially in the presence of eventinduced increase in variance. Yet, extreme market conditions do not affect the models’ ranking performance. Again the best approach is one of the regime-switching models with STAR event study model to show the overall best performance.

In a nutshell, we find empirical evidence to support that the best approach under contamination and event-induced increase in variance is the test statistic computed from the STAR event study model followed by V-TSMM and MV-TSMM. Overall, it is found that the STAR event study test statistic outperforms, in almost all cases, any other rival method.

Therefore, our analysis empirically supports that the STAR model should be employed in the application of short-horizon event studies since it appears to be the most credible method in detecting the true size of abnormal returns.

Acknowledgments The authors would like to thank Milto Hadjikyriakou for providing excellent research assistance. The authors also acknowledge comments and constructive suggestions from participants at the 5th CSDA International Conference on Computational and Financial Econometrics (December 2011, UK).

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Figures

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Figure 1. This figure provides size-power curves with event-induced return of 1% and an event-induced increase in return variance with simulated data.

BMP is as in Boehmer et al. (1991), RANK is as in Corrado (1989), GARCH is as in Savickas (2003), BETA-1 is the cross-sectional test using the constrained version of the market model, cBMP is the adjusted BMP test as in Kolari and Pynnönen (2010) and GRANK is the generalized RANK test as in Kolari and Pynnönen (2011). STAR estimates the market model according to a two-state transition variable, while V-TSMM and MV-TSMM are, respectively, the two-state market model extensions for variance and mean returns and variance following Aktas et al. (2007a).

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Figure 2. This figure provides size-power curves with event-induced return of 1% and an event-induced increase in return variance with M&As stock returns data.

BMP is as in Boehmer et al. (1991), RANK is as in Corrado (1989), GARCH is as in Savickas (2003), BETA-1 is the cross-sectional test using the constrained version of the market model, cBMP is the adjusted BMP test as in Kolari and Pynnönen (2010) and GRANK is the generalized RANK test as in Kolari and Pynnönen (2011). STAR estimates the market model according to a two-state transition variable, while V-TSMM and MV-TSMM are, respectively, the two-state market model extensions for variance and mean returns and variance following Aktas et al. (2007a).

Tables

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