MacKinlay: Event Studies Flashcards
What is the purpose of an event study?
When measuring the effects of an economic fae; a measure can be constructed easily using an event study. The usefulness of such a study comes from the fact that, given rationality in the marketplace, the effects of an event will be reflected immediately in security prices.
What is central to an event study?
the measurement of an abnormal stock return
What is the null hypothesis in an event study?
The null hypothesis is that the event has no impact on the distribution of returns
What is the abnormal return?
The actual ex post return of the security over the event window MINUS the normal return of the firm over the event window
What is the normal return?
The normal return is defined as the Expected return without conditioning on the event taking place
Which are the two common choices for modeling the normal return?
1. Constant mean return model where X is a constant (assumes that the mean return of a given security is constant through time)
2. Market model is a statistical model which relates the return of any given security to the return of the market portfolio. X is the market return (assumes a stable linear relation between the market return and the security return)
The market model is an example of a one factor model.
What is the most common way to define the estimation window?
Use the period prior to the event for the estimation window
The approaches to calculate normal return can be loosely grouped into two categories, which?
Statistical and economic
Statistical: follow from statistical assumptions concerning the behavior of asset returns and do not depend on any economic arguments
Economic: rely on assumptions concerning investors behavior and are not based solely on statistical assumptions
What is the factor model?
Another model to model the normal return. Factor models are motivated by the benefits of reducing the variance of the abnormal return by explaining more of the variation in the normal return. Typically the factors are portfolios of traded securities.
What is economic models?
Economic models can be cast as restrictions on the statistical models to provide more constrained normal return models
What are two examples of economic models?
- Capital Asset Pricing Model (CAPM)
- Arbitrage Pricing Theory
What is the CAPM?
An equilibrium theory where the expected return of a given asset is determined by its covariance with the market portfolio
Why is the market model better than the CAPM?
Sensitivity can be avoided at little cost by using the market model
Do the estimation window and event window overlap?
No.
Including the event window in the estimation of the normal model parameters could lead to the event returns having a large influence on the normal return measure.. both normal and abnormal return would measure the event impact and this is problematic because methodology is build around the assumption that the event impact is captured by the abnormal returns.
Why is CAR needed?
CAR is necessary to accommodate a multiple period event window
