A Markov Switching Re-evaluation of Event-Study Methodology

Rosella Castellano () and Luisa Scaccia ()
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Rosella Castellano: Università di Macerata, Dip. di Istituzioni Economiche e Finanziarie
Luisa Scaccia: Università di Macerata, Dip. di Istituzioni Economiche e Finanziarie

A chapter in Proceedings of COMPSTAT'2010, 2010, pp 429-436 from Springer

Abstract: Abstract This paper reconsiders event-study methodology in light of evidences showing that Cumulative Abnormal Return (CAR) can result in misleading inferences about financial market efficiency and pre(post)-event behavior. In particular, CAR can be biased downward, due to the increased volatility on the event day and within event windows. We propose the use of Markov Switching Models to capture the effect of an event on security prices. The proposed methodology is applied to a set of 45 historical series on Credit Default Swap (CDS) quotes subject to multiple credit events, such as reviews for downgrading. Since CDSs provide insurance against the default of a particular company or sovereign entity, this study checks if market anticipates reviews for downgrading and evaluates the time period the announcements lag behind the market.

Keywords: hierarchical Bayes; Markov switching models; credit default swaps; event-study (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-7908-2604-3_41

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DOI: 10.1007/978-3-7908-2604-3_41

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