Empirical Methods in Finance (Final) - Summary - Tilburg university - MSc Finance
32 views 2 purchases
Course
Empirical Methods in Finance
Institution
Tilburg University (UVT)
Instagram: ECOsummaries DM me for 20% discount!
Summary for the course 'Empirical Methods in Finance'. This summary was written in order to study for the final. Everything you need to know is available in this summary.
Instagram: ECOsummaries DM me for 20% discount!
,Topic 1 – Event studies
Efficient market:
Efficient market hypothesis (EMH): prices always fully reflect available and relevant information
- Prices only change when new information arrives.
- Information, by definition, cannot be predicted ahead of time.
→ Therefore, price changes cannot be predicted ahead of time.
Efficiency: speed and quality (direction & magnitude) of the adjustment.
Weak market efficiency:
- Prices reflect all information of the past.
→ Test for return predictability.
Semi-strong market efficiency:
- Prices reflect all information of the past + published information.
- Adjustments are direct & complete.
→ Use event studies.
Strong market efficiency:
- Prices reflect all information that might be relevant.
→ Test for insider information.
Event studies:
Event study: test of the change in stock prices around specific events
Example: earning reports, merger announcements, etc.
Intuition: examine the impact of an event on wealth of security holder and to test the efficiency
of the market.
- Announcement is more important than the actual event, as with the announcement the
information becomes public, and investors can react accordingly.
Conducting an event study – steps:
1. Identify the event of interest and its timing.
2. Specify a benchmark model for normal stock returns.
3. Analyse abnormal returns around the event date.
3
, Timing:
Estimation window: time period that
represent ‘normal’ times of the stock.
Event window: time period before and
after event.
Event: always at t=0
Post-event window: within event window,
after the event date.
Abnormal returns:
Idea: an event study measures the abnormal returns around an event.
→Abnormal returns = realized return – normal return
Normal return: returns expected in a normal situation without any event.
Benchmark models for normal return:
1. Own average return (mean adjusted)
* Inaccurate measure, noisy measures
* Normal return: note: T2 – T1 + 1 is for the # of days
2. Market return (market adjusted)
* Normal return:
3. Market model:
* Normal return = αi + βiRmt
* Abnormal return = εit
* Idea: estimate the average return and coefficients during the estimation window.
→ Use these estimations to construct normal/abnormal returns in the event window.
* Normal return:
4. CAPM: market model + restriction on alpha
* CAPM =
* Alpha restriction =
* Note: using macro events is dangerous with a market model / CAPM, as the whole market is
affected by these events instead of just the individual company.
* Normal return:
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ecosummaries. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $6.96. You're not tied to anything after your purchase.
