On Stochastic Volatility and More Powerful Parametric Tests of Event Effects on Unsystematic Returns

50 Pages Posted: 7 Feb 2000

See all articles by Jimmy E. Hilliard

Jimmy E. Hilliard

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Robert Savickas

George Washington University - School of Business - Department of Finance

Date Written: December 7, 1999

Abstract

Econometricians often emphasize that the use of a larger information set results in better parameter estimates and stronger hypotheses tests. The use of information on the stochastic behavior of the volatility of asset returns results in the formulation of more powerful parametric tests of the impact of a certain event (stock split, corporate restructuring, change in regulation, etc.) on assets' unsystematic returns. The key assumption in this study is that return volatility follows a mean-reverting diffusion whose discrete-time filter is a GARCH model. Using test statistics derived under this more general system of stochastic prices and volatility results in up to 18% higher rates of rejection of the false null hypothesis than the rejection rates of the pre-existing parametric tests. At the same time, the true null is rejected at the correct levels. The methodology is also applied to corporate spin-offs, resulting in some findings at variance with those obtained using the traditional test.

JEL Classification: C1, G14, G34

Suggested Citation

Hilliard, Jimmy E. and Savickas, Robert, On Stochastic Volatility and More Powerful Parametric Tests of Event Effects on Unsystematic Returns (December 7, 1999). Available at SSRN: https://ssrn.com/abstract=201257 or http://dx.doi.org/10.2139/ssrn.201257

Jimmy E. Hilliard

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

Department of Finance
Baton Rouge, LA 70803-6308
United States
225-578-7676 (Phone)
225-578-6366 (Fax)

Robert Savickas (Contact Author)

George Washington University - School of Business - Department of Finance ( email )

Funger Hall, Suite 501R
2201 G Street, N.W.
Washington, DC 20052
United States
202-994-8936 (Phone)
202-994-5014 (Fax)

HOME PAGE: http://savickas.net/

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