Markets: A Rigorous Course

M12 · Problem 4 ★★★

Exactness of the tt-test

Prove in full that, under the assumptions of Proposition 12.1, σ^i2\hat\sigma^2_i is independent of CARiCAR_i. State clearly which independence you use for the estimation-window part and which for the event-window part. Then explain why the result fails if the event window overlaps the estimation window.

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