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
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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