Lec 3 - intro to short-term event study Flashcards
What is an event study?
An econometric method that examines the impact of (corporate) events on asset prices
E.g:
- What is the price impact on stocks of a merger event?
What is an event date?
In event study, you work with event dates rather than calendar dates
They help mark the important event dates on a timeline:
- Event date = day 0, 1, -1
- Calendar date = 16th Oct 2012
What is an example of a corporate event?
Walt Disney’s acquistion of Marvel
- Building on strategy of quality branded content to people around Disney in stock and cash
- $50 per Marvel share = $4
Marvel’s IPO
- Offering 30% of the company to the public through common stock
What are the main questiosn answered by event studies?
How does share price respond to corporate event?
How does the market respond to corporate event?
What is the wealth effect of a corporate event on shareholder?
(these are all similar questions)
What is a short-term event study?
What is the short term effect of an event
Examines price impact in a few days around day 0; less than one year
What is long-term event study?
What is long-term effect of an event?
Examines the price impact over a period longer than one year after the completion date
What is an important assumption of the event study methodology?
Market is semi-strong form efficient
What is the efficient market hypothesis?
Refers to informational efficiency
- An efficient market correctly incorporates all the information available
- All the information available are incorporated into asset prices
What kinds of information are available on the financial markets?
Historical information:
Historical share prices, historical trading volume, historical liquidity
Public (current information:
Dividend announcement, merger announcement, BOE announces interest rates
Insider information:
Earnings prior to announcement, merger proposal being privately discussed
What are the 3 forms of market efficiency?
Weak form efficiency: all historical information is incorporated in market prices
Semi strong form: all historical and public information is incorporated in market prices
Strong form: All information is reflected in market price, including historical, public and insider information
What are the 2 implications of the efficient market hypothesis?
Asset price changes instantly in response to new information
No one can make excess or abnormal return/profit consitently
What are other impacts of EMH?
No arbitrage opportunity on an efficient market
All returns are justifiable by risk I.e all returns are appropriate for the corresponding level of risk
What is the principle of all event studies?
To understand principle - need to understand the observed (actual) return, the abnormal return and the expected return
- Price impact should not be measured by the observed return, because it might be owing to the returns to common risk factors
What are the two elements in the return generating process?
Non-event time: risk-return dynamics (common risk factors)
Event time: new information revealed during the event (incremental the above process)
What is the abnormal return used for?
To measure the price impact I.e the difference between the observed return and the expected return
- Purge the return owing to common factors
- Attribute the price impact (return) to the event of interest
What is abnormal return?
Return - Expected return
