L3 Flashcards
Abnormal Return =
Realized Return - Expected Return
3 ways of calculating expected returns
1 - Mean adjusted returns
2 - Market adjusted returns
3 - Expected returns according to market models
Good practice in event studies windows
Leave space to avoid contamination between estimation window and event window
Longer estimation windows lead to
higher precision
but also
higher risk of structural break
To build event studies we need:
- unexpected shocks
- sudden release of information
- high frequency data
To understand stat significance of CAR we need:
Avg CAR(t1,t2) and Var ( Avg CAR(t1,t2) )
Estimate Var ( Avg CAR(t1,t2) )
1 - Sample variance for each stock in estimation window
2 - Take the average
3 - Compute the CAR variance = (t2 - t1+ 1) * Step 2
CAR follows a normal distribution when
Large samples
t-stat for H0: Avg CAR(t1, t2) = 0
Avg CAR (t1, t2) / SQRT ( Var (avg CAR (t1,t2)))
What do Shapiro-Wilk and Breusch-Pagan have in common
We are looking for large p-values
We want to not reject the H0
To trust t-tests and f-tests we need
MLR 1-6
In large sample, OLS estimators are
asymptotically normal
Even if OLS estimators are asymptotically normal, we still need:
erros to be iid(0, sigma-square), independent and identically distributed
in iid, what is i
independent, means that values are uncorrelated
in iid what is id
identically distributed -> values have same variance
