Levels of significance in event studies

Standard event-study methods compare the returns in the window with forecasted values based on a benchmark period. These methods fail to account for the fact that errors in parameter estimates in the benchmark period give serially correlated errors in the window's abnormal returns. This is true both of mean-adjusted returns and market-model adjusted returns. This oversight leads to overstatement of significance levels, the degree of overstatement varying positively with the ratio of periods in the window to periods in the benchmark period. Sometimes the overstatement is minimal, but it can be substantial if the window is large relative to the benchmark period.