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JOURNAL OF APPLIED BUSINESS AND ECONOMICS
Unreliable Inference for Business and Economic Event Studies Based on Variance
Dummy Variable in a GARCH Regression Model
Author(s): Yonggang Lu, Wei Chen
Citation: Yonggang Lu, Wei Chen, (2011) "Unreliable Inference for Business and Economic Event Studies Based on Variance Dummy Variable in a GARCH Regression Model," Journal of Applied Business and Economics, Vol. 12, Iss. 5, pp. 45 - 53
Article Type: Research paper
Publisher: North American Business Press
Abstract:
GARCH models with dummy variables included in variance equations have been often used in various
business and economic event studies to detect temporary volatility structure break. However, this
methodology can be questionable if the event window is relatively short. In this paper, through simulation
studies, we show that with a short event window, this GARCH-dummy methodology may afford unreliable
statistical inferences in that variance deflation can be overstated. On the other hand, variance inflation
can be understated. Moreover, based on results of our simulation studies, we provide some practical
advices on applying the GARCH-dummy methodology in event studies.
