Measuring Security Price Performance

This article is written by Stephen J. Brown and Jerold B. Warner in the 1980’s and aims to measure and focus on the impact of events on the performance of security returns. The events can be firm specific (e.g., stock splits, earning reports) as well as on a broader macroeconomic level (government policies, changes in corporate tax slabs etc). Based on this theory, they aim to predict expected abnormal returns on a security based on the expected occurrence of a particular event. Through this paper they also try to gauge, the time interval or the length of time around which effects of these abnormal performance persist around the expected event. The researchers try to determine the accuracy of different performance measures to predict or identify the abnormal performance in the securities. Some of the performance measures used by the researchers are i) ii) iii) Mean Adjusted Returns Market Adjusted Returns Risk Adjusted Returns

Their primary aim is to determine the power of the various methodologies employed. Power is defined as the probability, for a given level of Type I error and a given level of abnormal performance, that the hypothesis of no abnormal performance will be rejected. They hypothesis formulated are H0: There is no abnormal performance in the observed security returns. By manually introducing abnormal returns in the securities, the researchers calculate the Power of different methodologies at different levels of significance. For any security, the researchers in particular also study the ex ante return and ex post returns and measure the deviations from the normal returns. The test statistics under each of the methodologies are calculated using different statistical techniques and by varying the underlying characteristics of these techniques upon which the test estimates are based (e.g. One Tailed Test vs. Two Tailed Test). The experimental design uses 250 samples each containing 50 securities and considering their monthly returns. Abnormal performance is introduced intentionally into each of these security returns by adding a constant to the security’s observed return. From the empirical data and the research methodology employed, it is found that the determination of the timing of the event plays an important role. The power of any performance measure is heavily dependent upon the certainty with which we can predict the occurrence of the event. In the study when the interval containing the event is narrowed, the performance of each of the performance measures increases markedly. In order to determine with certainty the event in any interval, the technique of Cumulated Average Residuals (C.A.R) was employed. The C.A.R for any given sample was similar to a random walk. This walk was observed for an interval (-10, 10). For a given sample the month of abnormal performance was uniformly distributed across securities. It was seen that a spike is observed in the random walk at the time of event generating abnormal security returns.

Submitted to: Dr. Muhammad Nishat Submitted By: Abdul Wahab Shahid

It is seen that in many cases the simple method of Mean Adjusted return when compared to the other methodologies employed performs better under different underlying assumptions. It was observed that Value Weighted index rejected Null hypothesis more often than the Equal Weighted Index. but the event date can vary across samples. When the different methodologies were tested. Muhammad Nishat Submitted By: Abdul Wahab Shahid . The methodologies also studies Value Weighted Index vs. The conclusion from this research paper is that although we cannot authoritatively say that a particular methodology trumps the other. The general impact of clustering was to lower the number of securities whose month ‘0’ behavior is independent.Measuring Security Price Performance The impact of clustering on the abnormal performance of security returns was also studied. the Equal Weighted index in the portfolios. Submitted to: Dr. Clustering means that the event date under study in any particular sample is the same for all securities included in that sample. It was seen that for randomly selected securities when employing value weighting the average beta is 1. Thus.13 (greater than 1) as compared to equal weighting where the average beta is 1. it was seen that the simple method of Mean Adjusted Returns performed very poorly compared to other methods that adjusted for market and systematic risk. In this methodology the samples were divided into low risk betas and high risk betas. However this result doesn’t imply that there was any bias towards selection of high risk betas. the more complicated methodologies were seen to distort the results and not measure the impact of abnormal performance about the event with any more accuracy.

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