More Powerful Portfolio Approaches to Regressing Abnormal Returns on Firm‐Specific Variables for Cross‐Sectional Studies

RAMESH CHANDRA*, BALA V. BALACHANDRAN

*Corresponding author for this work

Research output: Contribution to journalArticle

19 Scopus citations

Abstract

OLS regression ignores both heteroscedasticity and cross‐correlations of abnormal returns; therefore, tests of regression coefficients are weak and biased. A Portfolio OLS (POLS) regression accounts for correlations and ensures unbiasedness of tests, but does not improve their power. We propose Portfolio Weighted Least Squares (PWLS) and Portfolio Constant Correlation Model (PCCM) regressions to improve the power. Both utilize the heteroscedasticity of abnormal returns in estimating the coefficients; PWLS ignores the correlations, while PCCM uses intra‐and inter‐industry correlations. Simulation results show that both lead to more powerful tests of regression coefficients than POLS. 1992 The American Finance Association

Original languageEnglish (US)
Pages (from-to)2055-2070
Number of pages16
JournalThe Journal of Finance
Volume47
Issue number5
DOIs
StatePublished - Jan 1 1992

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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