Premium
The Validity of the Event‐study Approach: Evidence from the Impact of the Fed's Monetary Policy on US and Foreign Asset Prices
Author(s) -
ROSA CARLO
Publication year - 2011
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.1468-0335.2009.00828.x
Subject(s) - heteroscedasticity , economics , monetary policy , estimator , event study , asset (computer security) , econometrics , ordinary least squares , event (particle physics) , sample (material) , capital asset pricing model , monetary economics , financial economics , statistics , mathematics , computer science , paleontology , context (archaeology) , physics , computer security , quantum mechanics , biology , chemistry , chromatography
This paper documents the effects of changes in US monetary policy on asset prices in 51 countries to evaluate the validity of the event‐study approach. We find that the event‐study estimates contain a significant bias. However, this bias is fairly small and the ordinary least squares approach tends to outperform in an expected squared error sense the heteroscedasticity‐based estimator for both small and large sample sizes. Hence in general the event‐study methodology should be preferred. Moreover, we show that US monetary policy has been an important determinant of global financial markets.