Abstract
We generalize traditional event-study techniques to allow for event-induced parameter shifts, shifting variances, and firm-specific event periods. Our method, which nests traditional methods, also permits systematic risk to change gradually during the event period and exit the period at higher or lower levels. We use our approach to study 123 banks that acquired other institutions between 1989 and 1995. We find a significant change in the systematic risk of the acquiring firms, significant ARCH effects, and an event period that ends before the date of the announcement. None of these results is detectable using conventional methods.
Similar content being viewed by others
References
Ball, C. and W. Torous, “Investigating Security-Price Performance in the Presence of Event-Date Uncertainty.” Journal of Financial Economics 22, 123-153, (1988).
Bar-Yosef, S. and L. Brown, “A Reexamination of Stock Splits Using Moving Betas.” Journal of Finance 32, 1069-1080, (1977).
Boehmer, E., J. Musumeci and A. Poulsen, “Event-Study Methodology Under Conditions of Event-Induced Variance.” Journal of Financial Economics 30, 253-272, (1991).
Brown, S. J. and J. B. Warner, “Measuring Security Price Performance.” Journal of Financial Economics 8, 205-258, (1980).
Brown, S. J. and J. B. Warner, “Using Daily Stock Returns: The Case of Event Studies.” Journal of Financial Economics 14(1), 3-31, (1985).
Brown, K. C., L. J. Lockwood and S. L. Lummer, “An Examination of Event Dependency and Structural Change in Security Pricing Models.” Journal of Financial and Quantitative Analysis 20(3), September, 315-334, (1985).
DeGennaro, R. P. and J. B. Thomson, “Anticipating Bailouts: The Incentive-Conflict Model and the Collapse of the Ohio Deposit Guarantee Fund.” Journal of Banking and Finance 19, 1401-1418, (1995).
de Jong, F., A. Kemna and T. Kloek, “A Contribution to Event Study Methodology with an Application to the Dutch Stock Market.” Journal of Banking and Finance 16, 11-36, (1992).
Engle, R. F., “Autoregressive Conditional Heteroskedasticity with Estimates of the Variance UK Inflation.” Econometrica 50, 987-1008 (1982).
Fama, E. F. and K. R. French, “The Cross-Section of Expected Stock Returns.” Journal of Finance 47, 427-465, (1992).
Frame, W. S. and W. D. Lastrapes, “Abnormal Returns in the Acquisition Market: The Case of Bank Holding Companies, 1990-1993.” Journal of Financial Services Research 14(2), 145-163 (1998).
Hamilton, J. D. and R. Susmel, “Autoregressive Conditional Heteroskedasticity and Changes in Regime.” Journal of Econometrics 64, 307-333, (1994).
Haw, I.-M., V. S. Pastena and S. B. Lilien, “Market Manifestation of Nonpublic Information Prior to Mergers: The Effect of Ownership Structure.” The Accounting Review 65, 432-451, (1990).
Henderson, G. V., Jr., “Problems and Solutions in Conducting Event Studies.” Journal of Risk and Insurance 57, 282-306, (1990).
Hildreth, C. and J. P. Houck, “Some Estimators for a Linear Model with Random Coefficients.” Journal of the American Statistical Association 63, 584-595, (1968).
Houston, J. F. and M. D. Ryngaert, “The Overall Gains from Large Bank Mergers.” Journal of Banking and Finance 18, 1155-1176, (1994).
Ibbotson, R. G., “Price Performance of Common Stock New Issues.” Journal of Financial Economics 2, 235-272, (1975).
Lee, J. and R. P. DeGennaro, “Smooth Transition ARCH Models: Estimation and Testing.” Review of Quantitative Finance and Accounting 15, 5-20, (2000).
Lockwood, L. and R. Kadiyala, “Risk Measurement for Event Dependent Security Returns.” Journal of Business and Economic Statistics (1), January, 43-49, (1988).
Madura, J. and K. J. Wiant, “Long-Term Valuation Effects of Bank Acquisitions.” Journal of Banking and Finance 18, December, 1135-1154, (1994).
Malatesta, P. H., “Measuring Abnormal Performance: The Event Parameter Approach Using Joint Generalized Least Squares.” Journal of Financial and Quantitative Analysis 21, March, 27-38, (1986).
Mandlebrot, B., “The Variation of Certain Speculative Prices.” Journal of Business 36, 394-419, (1963).
Meulbroek, L. and C. Hart, “The Effect of Illegal Insider Trading on Takeover Premia.” European Finance Review 1, 51-80, (1997).
Mikkelson, W. H. and M. M. Partch, “Valuation Effects of Security Offerings and the Issuance Process.” Journal of Financial Economics 15, 31-60, (1986).
Scholes, M. and J. T. Williams, “Estimating Betas from Nonsynchronous Data.” Journal of Financial Economics 5(3), 309-327, (1977).
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Cyree, K.B., DeGennaro, R.P. A Generalized Method for Detecting Abnormal Returns and Changes in Systematic Risk. Review of Quantitative Finance and Accounting 19, 399–416 (2002). https://doi.org/10.1023/A:1021162208290
Issue Date:
DOI: https://doi.org/10.1023/A:1021162208290