Title: Event-studies and (endogenous) zero returns
Authors: Fabrice Riva - Universite Paris-Dauphine (France) [presenting]
Laurent Deville - EDHEC Business School (France)
Juan Raposo - Universite Paris-Dauphine (France)
Abstract: Zero returns are a pervasive phenomenon on stock markets. Failure to account for their potential endogeneity leads to (OLS) market model parameter estimates that are systematically biased. Taking the view that zero returns endogenously arise from implicit transaction costs, we estimate the parameters of stocks true return-generating process using a latent variable estimation technique. We test the usefulness of our approach in the context of event-studies. Based on a previous simulation framework, we show that our new estimates lead to better specification and increased power for statistical tests of abnormal returns.