Lec 5 - Introduction to Long-Term Event Study Flashcards
How long is the Test Period in Long-term event study
3-5 years
What are the 2 broad approaches of long-term event study?
Asset-pricing model
Characteristics-based matching model
what is the intercept in asset-pricing models?
Jensen’s alpha
Should be significantly different from 0 if it doesn’t have a long term effect
What does jensen’s alpha measure
Monthly abnormal return
What is the theoretical foundation of the characteristics-based matching approach?
The coefficients of risk factors - it implies that companies with the same coefficients of risk factor should have same expected returns
(beta gamma and sigma in famafrench)
What do Daniel and Titman say?
Risk characteristics are what matters for required rate of return/expected return
What are the usual risk characteristics
Size
Book-to-market
Return in last 6-12 months
Liquidity
There is correspondence between risk factors and characteristics
What is the matching firm procedure?
Find a single non-event firm who have similar risk characteristics (matched)
Use the matching firm as benchmark return
Matching can be based on 1 or more risk characteristics
(Matching post event is more important than pre-event and can use more than 1 matching firm)
What is the reference portoflio procedure?
Form a portfolio using the non-event firms that have similar risk characteristics
Use portfolio’s returns as a benchmark
Sort firms into groups by risk characteristics:
1. Parallel sorting
2. Sequential sorting
How do we measure abnormal return under the characteristics-based matching approach?
BHAR (difference between event firm’s buy and hold return (BHR) and non-event firm matching firms (reference portfolio’s buy and hold return)
rit = observed return to event firm in month t
E(rit) = expected return for firm i (observed return on reference portfolio) in month t
