The Kalman Filter in the Event Study Methodology
Revista Mexicana de Economia y Finanzas, Vol.2, No.1, pp. 81-93, 2003
25 Pages Posted: 31 Aug 2005
Abstract
We extend the event study methodology into a richer and more dynamic environment by including time-varying parameters. Under the Bayesian framework, useful to update relevant information in a sequential learning mechanism, we use the Kalman filter to consider time dependent parameters, and we choose the initial distribution by using an information theory framework. The proposed extension leads to a more robust set-up in appraising the impact of economic and financial events on the market value of firms.
Keywords: Event study, Kalman filter, information theory
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