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Andries Alin, PhD Alexandru Ioan Cuza University of Iasi Faculty of Economics and Business Administration Postgraduate study in Finance and Risk Management Year 1 (2011-2012) Semester 2
Impact of an event on
global financial markets, national financial markets, equity or debt markets, one sector, one company.
Impact of an event on
value of assets, return variance, trading volume, operating performance, total revenue etc.
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First stage
Defining the event under investigation; Determining the selection criteria for the inclusion of a given firm(s) in the study; Identify the period over which the security prices of the firms involved in this event will be examined (prior and post- event)
Type of event
Are we able able to anticipate the event?
No
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Second stage
measuring the stocks performance for window period;
Ri, t+ n =
pi, t+ n pi, t p i, t
Ri, t+ n = ln(
p i, t+ n p i, t
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Third stage
Measuring the expected return, the return that would have accrued to the shareholders in the absence of this or any other unusual event Selecting and applying the model of expected returns
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Rit = i + it
where, Rit is the return for stock i over time period t, i is the expected return for stock i, and eit is the usual statistical error term.
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Ri, t = i + i Rm, t + i, t
where, ai and bi are firm-specific parameters, and Rmt is the market return for the period t.
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Ri, t = Rf + i ( Rm, t Rf ) + i, t
where, Rf is the risk free rate and i is the beta or systematic risk of stock i.
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Fourth stage
The unexpected announcement period return, also known as the abnormal return, is computed as the actual return minus the estimated expected return.
This abnormal return is the estimated impact of the event on the share value.
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Type of event
Single event
Multiple events
Cumulative average abnormal returns (CAR) could be calculated over following different time intervals [ -1,+1], [ -2,+2], [ -5,+5], [ -10,+10] ..
Following Brown and Warner (1985) we can calculate the statistical significance as follows:
where
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References:
Stephen Brown, and Jerold Warner, 1980, Measuring Security Price Performance, Journal of Financial Economics, 8, 205-258. Corrado, Charles, 1989, A nonparametric test for abnormal security-price performance in event studies, Journal of Financial Economics, Vol. 23, No. 2, pp. 385-395. Craig MacKinlay, 1997, Event Studies in Economics and Finance, Journal of Economic Literature, 35, 13-39. Charles Corrado, 2011, Event studies: A methodology review. Accounting & Finance, 51: 207234. S.P. Khotari, and Jerold Warner, 2006, Econometrics of Event Studies, in Espen Eckbo (ed.), Handbook of Corporate Finance: Empirical Corporate Finance, Volume A (Handbooks in Finance Series, Elsevier/North-Holland) Benninga, Simon, 2008, Financial modeling, 3rd ed., The MIT Press
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Take-home
One page with one (or more) potential research ideas based on the event study methodology.